certified financial planner exam preparation...

CERTIFIED FINANCIAL PLANNER Exam preparation material

Prepared by : Harminder Garg, CFPCM

IIFC – Indian Institute for Financial Certifications Chandigarh off : SCF 9, 2nd Floor, Phase 11, Mohali Delhi off : 17A/32, Karol Bagh, New Delhi Website : www.iifcedu.in Email Id : [email protected]

Contact details : 82838 42598, 0172 – 4001566

Version 4 : May 2020

http://www.iifcedu.in/

mailto:[email protected]

Harminder Garg, CFPCM

Profile A result-oriented finance professional with proven abilities in financial planning of clients and training for CFP aspirants. I have worked in corporate sector for 15 years in leading brands like ICICI Securities, HDFC Bank, FPSB India, ICICI Bank in Mumbai, Delhi & Chandigarh.

I worked with FPSB India (CFP Certification board in India) during 2008-10 in Knowledge Management dept. I have 7 years rich experience in content writing & training delivery in ICICI Securities as Zonal Training Manager. I also have Client relationship management experience as I worked as State Head in ICICI Securities and Private Banker in HDFC Bank.

I have cleared CFP Certification challenge status exam in “A” Grade in year 2007. I have done Executive PGDM in finance from IMT Ghaziabad, PG in Financial Advising from IIBF and NISM Investment Advisor Level 1 (XA), NISM Investment Advisor Level 2 (XB) & Retirement Advisor module.

I started CFP Challenge status trainings in year 2011 along with my association in corporate sector. I started IIFC (Indian Institute for Financial Certification) to provide training for CFP Certification, NISM XA & XB Certification, NISM Retirement Advisor Certification, IIBF - Advance Wealth Management Certification.

Email: [email protected] www.iifcedu.in Prepared by: Harminder Garg, CFPCM



Prepared by: Harminder Garg, CFPCM Email : [email protected] www.iifcedu.in

Till date I have done 14 batches of this workshop and with success strike ratio of 82%, Total 52 candidates cleared CFP Certification exam and achieved Global mark in Financial Planning.

In April 2020, during lockdown period 42 Students joined us for CFP virtual training (through Zoom Video conferencing) in 4 batches : Batch 1 - (Tue, Thu & Sat & Sun) – Morning 7 am to 9 am Batch 2 - (Tue, Thu & Sat & Sun) – Evening 7 pm to 9 pm Batch 3 – (Mon, Wed, Fri) - Morning 7 am to 9 am & Sunday 12 pm to 2 pm Batch 4 - (Mon, Wed, Fri) - Evening 7 pm to 9 pm & Sat 12 pm to 2 pm

List of 52 Candidates who Cleared CFP Exam through my workshops

Sr. No.

Name of Employee Designation Company Name City Name

1 Rishi Jiwan Gupta CEO Wealthways Chandigarh 2 Mukesh Kapri Senior Branch Manager ICICI Securities Delhi 3 Manpreet Singh Brar Relationship Manager SBI Mutual Fund Chandigarh 4 Varun Associate Moody’s Analytics Delhi 5 Dheeraj Ahuja Regional Head ICICI Securities Delhi 6 Ajay Jha Regional Head ICICI Securities Hyderabad 7 Sanjeev Chaudhary VP Yes Bank Delhi 8 Vivek Singh Branch Manager ICICI Securities Noida 9 Ashish Shoundik Sr Cluster Manager ICICI Securities Delhi

10 Rajan Rawat State Head ICICI Securities Delhi 11 Charu Pahuja Director & Business Head Wise Finserv Pvt. Ltd. Noida 12 Ajay Kumar Yadav CEO & CIO Wise Finserv Pvt. Ltd. Noida 13 Mayur Tandon Cluster Collection Manager Fullerton India Credit Delhi 14 Anju Rana IFA Delhi 15 Puneet Khanna Head - Affinity Business Edelweiss General

Insurance Mumbai

16 Paras Chandna Business Analyst CSC Noida 17 Surinder Singh DVP Validus Wealth Delhi 18 Hemant Goyal Chief Manager - Corporate

Finance ICICI Bank Gurugram

19 Shakti Manchanda Founder Parkworth Investment Advisor

Delhi

20 Arun Aggarwal AGM - Corporate Banking ICICI Bank Delhi 21 Shobhit Gupta Branch Manager ICICI Securities Mumbai 22 Ashish Jain Sr Team Leader ICICI Securities Delhi




Sr. No. Name of Employee Designation Company Name City Name 23 Charu Malhotra Visiting Faculty Ghaziabad 24 Mamta Kumari IFA & Visiting Faculty Delhi 25 Vivek Bhardwaz GM - Sales Vinsak India Pvt. Ltd. Delhi 26 Bharat Jain Chief Manager -EPC Group ICICI Securities 27 Ajay Anand Zonal Head - Sales Angel Broking Bengaluru 28 Sathish Kumar Investment Consultant DBS Bank Chennai 29 Sagar Gandhi AVP - Research Analyst Future Generali Life

Insurance Mumbai

30 Anindita Sen AVP ICICI Securities Mumbai 31 Kavan Udgiri Regional Head Reliance Securities Hyderabad 32 Piyush Shukla Sr. Manager Chattishgarh rajya gramin

bank Delhi

33 Parul Jaiswal Regional Head - Sales ICOFP Delhi 34 Monica Anand IFA & Visiting Faculty Delhi 35 Iti Tripathi Business Solution

consultant NIIT Tecnologies Ltd. Delhi

36 Rajeev Arora Founder Alpha Creators Ghaziabad 37 Vinay S Chief Manager - Sales

Development ICICI Securities Mumbai

38 Charu Hastir Founder Tikkun Olam FP Services Bengaluru 39 Amit Singhvi Freelance Trainer Udaipur 40 Kishan Vasista Zonal Manager - L&D ICICI Securities Bengaluru 41 Paavan Buch Regional Manager -

Financial Planning ICICI Securities Ahmedabad

42 Yogesh Laad Director - Private Banking HDFC Bank Hyderabad 43 Rajagopal P Director - Products &

Innovation Visa Mumbai

44 Naresh Sabhnani Business Analyst Wipro Jaipur 45 Kamaksha Bhatia Manager - Products HDFC Bank Mumbai 46 Gulzar Maniyar Manager - Financial

Planning ICICI Securities Mumbai

47 Dheer Sheth Equity Advisor ICICI Securities Mumbai 48 Chintan Vora VP 5nance.com Mumbai 49 Charu Kohli Chief Manager - Capability

Enhancement ICICI Bank Mumbai

50 Amitkumar Tulsyan Regional Product Manager ICICI Securities Mumbai 51 Akhil Goel Manager – Equity Advisor ICICI Securities Mumbai 52 Aditya Dhage VP & Sr. Wealth Manager Sanctum WM Mumbai




Table of Contents

Serial no. Topics Page No. Module 1 Introduction to Personal Financial Planning 1 - 25

Question for Practice 1 to 33 26-36

Module 2 Risk Assessment & Insurance Planning 37-55 Question for Practice 1 to 23 56-63

Module 3 Retirement Planning 64-78

Question for Practice 1 to 30 79-88

Module 4 Investment Planning 89-108 Question for Practice 1 to 22 109-114

Module 5 Income Tax Planning 115-149 Question for Practice 1 to 33 150-160

Module 6 Estate Planning 161 - 169 Question for Practice 1 to 13 170-173

Module 7 Financial Planner Code of Ethics & Professional responsibility

174-188

Question for Practice 1 to 25 188-195 Additional theory questions 196 -206 CFP Syllabus 207-214

FPSB Sample Case Studies

Roger - with 15 Questions 215-220 Urvashi - with 15 Questions 221-227

FPSB Sample Cases with Probable Questions

Mr. Ashwin – with 7 Questions 228-232 Mr. Gurpreet – with 8 Questions 233-237 Mrs. Sahanubuti – with 9 Questions 238-242 Mr. Mahesh – with 5 Questions 243-247 Mr. Sanjay – with 6 Questions 248- 252

Goal Seek Questions 253-254

Disclaimer : We have taken Case Studies & CFP Syllabus from FPSB India Website & Incorporated in this study material to facilitate CFP Students.



These Pages extracted from FPSB CFP Syllabus

Phone: +91 91 5271 9562

Email: [email protected]

Website: india.fpsb.org

Syllabus & Topic List CFPCM Certification Program

Financial Planning’s Highest Global Standard

CFPCM, CERTIFIED FINANCIAL PLANNERCM and are certification marks owned outside the U.S. by Financial Planning Standards Board Ltd. (FPSB).


https://india.fpsb.org/


About Financial Planning Standards Board Ltd. (FPSB Ltd.)

FPSB Ltd. manages, develops and operates certification, education and related programs for financial planning organizations to benefit the global community by establishing, upholding and promoting worldwide professional standards in financial planning. FPSB demonstrates its commitment to excellence with the marks of professional distinction – CFP, CERTIFIED FINANCIAL PLANNER and CFP Logo Mark – which it owns outside the United States. The FPSB global network consists of organizations in the following 27 territories: Australia, Austria, Brazil, Canada, Chinese Taipei, Colombia, France, Germany, Hong Kong, India, Indonesia, Ireland, Israel, Japan, Malaysia, the Netherlands, New Zealand, People’s Republic of China, Peru, Republic of Korea, Singapore, South Africa, Switzerland, Thailand, Turkey, the United Kingdom and the United States. At the end of 2018, there were 181,360 CFP professionals worldwide. For more, visit fpsb.org.

Effective 1 April 2019, FPSB Ltd. has taken over administration of India’s CFP certification program. From that date forward, all matters and inquiries pertaining to India's CFP certification program should be directed to FPSB Ltd.

Format of CFPCM Examination

Testing Method: The format of CFPCM examination conducted by FPSB Ltd. is objective Multiple Choice Questions (MCQ) in a Computer-based Testing (CBT). It has the virtues of online examination in that candidates can self-schedule date and time slot, test center of their choice as well as the order in which to appear in individual exams. It is a server based examination generating a unique set of question items in a specified arrangement and difficulty grade for each candidate in his/her one or more attempts. The examination takes place in controlled and secured environment of Exam Administrator at their specified test centers throughout India. The link for test centers is:

http://nseindia.com/education/content/testing_center.htm

Exam Duration:

Exam 1 – 4: Two (2) hours each for Exam 1, Exam 2, Exam 3 and Exam 4

Exam 5 ( Advanced Financial Planning or Challenge Status Exam) : Four (4) hours

https://www.fpsb.org/

http://nseindia.com/education/content/testing_center.htm


Structure of CFPCM Examination

Exam 1 – 4 tests the competency of a candidate in individual components of Financial Planning. They can be attempted in any order by the candidate. Only after a candidate is successful in all the component exams, Exam 1 – 4, he/she is eligible to take an attempt at the final exam, Exam 5. The format followed is objective multiple choice questions which are disjointed for component exams and intricately linked to Case Studies simulating real life financial situation of a household towards achieving financial goals. The following table explains the testing guidance and composition of exams:

Module

Name Testing Exam

Exam

Composition

No. of items

Marks

Categories $

Module I* Introduction to Financial Planning

NA NA NA NA

Module II Risk Analysis & Insurance Planning

Exam 1 Module I – 20% Module II – 80%

77 1,2,3 & 4

Module III Retirement Planning & Employee Benefits

Exam 2 Module I – 20% Module III – 80%

77 1,2,3 & 4

Module IV Investment Planning Exam 3 Module I – 20% Module IV – 80%

77 1,2,3 & 4

Module V Tax Planning & Estate Planning

Exam 4 Module I – 20% Module V – 80%

77 1,2,3 & 4

Module VI Advanced Financial Planning

Exam 5 Case Study # format

2 Case Studies/ 30 items

2,3,4 & 5

* Module-I consists of generics of Financial Planning, viz. the Process, Practice Standards,

Professional Conduct, Code of Ethics, etc. apart from Financial Mathematics. This module is embedded in all component exams, Exam 1 – 4 to the extent of 20% and in the Advanced Financial Planning exam (Exam 5) to the extent of 14%.

# Other component weights in Advanced Financial Planning Exam: Insurance 18%;

Retirement 16%; Investment 32%; Tax & Estate matters 20%.

$ Marks categories in increasing order signify the complexity and difficulty level of each item and seek to test in that order the extent of information or knowledge, clarity of concepts,

basic skills, analytical skills, and advanced analytical skills requiring strategy evaluation & synthesis.


Pattern of Module VI (Exam 5):

The format of Exam 5: Advanced Financial Planning is the Case Study format where a candidate would be required to solve a set of 30 question items based on any two of a set of case studies. The probable case studies will be displayed on FPSB Ltd’s website. Any two of these case studies would appear (in random selection) for every candidate who logs in to appear in the examination.

Items per Case Study: 15 / Total Marks per Case Study: 50

Total items Exam 5 : 30 / Total Marks Exam 5 : 100

Exam duration: 4 hours – No Negative Marking

Exam 5: Pattern of Questions in each Case Study

Financial Planning & Ethics

Risk Assessment & Insurance Planning

Retirement Planning

Investment Planning

Tax Planning & Estate Planning

Items Marks Items Marks Items Marks Items Marks No Items Marks

Marks Category

2 2 4 1 2 0 0 1 2 1 2

3 1 3 1 3 1 3 0 0 1 3

4 0 0 1 4 0 0 1 4 0 0

5 0 0 0 0 1 5 2 10 1 5

Total 3 7 3 9 2 8 4 16 3 10


Detailed Testing of Competency over Various Components: Each case study would be followed by a set of 15 question items spread over 5 distinct sections (above matrix) covering various financial planning components. The distribution of these items over the marks-categories of 2, 3, 4 and 5 marks constitutes the weights of these components in Advanced Financial Planning. These marks categories are broadly ordained to signify as follows which are their testing criteria. Also given alongside is these categories’ total weight per case study.

The complexity and difficulty level of question items from 2-mark to 5-mark items would also involve time consumption individually to justify four-hour duration of Exam 5. The expected time consumption of on an average 90 seconds each in 2-mark items, 3 minutes each in 3-mark items, 10 minutes each in 4-mark items and 15 minutes each in 5-mark items, which is desired of a candidate possessing enough knowledge, technical skills and strategic thinking to be on the verge of being a professional making and executing financial plans, would justify the allotted duration to complete Exam 5. Enough time is also provisioned to link the question items to the case study, understand the subject household’s financial goals, strategies adopted and available resources to arrive at the most appropriate alternatives.

As can be seen from below and reiterated here is the relatively much higher bias towards testing analytical aptitude and strategic thinking requiring synthesis of various goals of a client in a unified financial plan.

Marks

2-mark

Theoretical testing knowledge ‘Grade 1’ Items

5

Mark

s

1

0

Weight

2 0 %

3-mark Theoretical testing clarity of concepts or Numerical testing basic skills

‘Grade 2’ 4

12 2 4 %

4-mark

Numerical testing analytical skills

‘Grade 3’

2

8

1 6 %

5-mark Numerical testing advanced analytical skills, strategy evaluation & synthesis

‘Grade 4’ 4

20 4 0 %

Total

1 5

50 1 0 0 %

CFPCM Certification Exam preparation material

Email : [email protected] www.iifcedu.in Prepared by: Harminder Garg, CFPCM

1

Introduction to Personal Financial Planning

Financial planning is the process of developing strategies to assist consumers in managing their financial affairs to meet life goals. The process of financial planning involves reviewing all relevant aspects of an individual’s situation across a large breadth of financial planning activities, including inter-relationships among often conflicting objectives. The process of financial planning typically involves some or all of the following steps: 1. Establishing and defining the relationship with the client, including an evaluation of the financial planner’s ability to serve the client; 2. Collecting qualitative and quantitative client information; 3. Analyzing and assessing the client’s information, objectives, needs and priorities; 4. Identifying and evaluating strategies and developing recommendations and presenting them to the client; 5. Implementing the recommendations, which requires reaching agreement with the client on responsibilities and having appropriate licenses to deliver financial products and services; and 6. Reviewing the client’s situation on an ongoing basis to ensure the recommendations continue to be appropriate in changing market environments or client situations. Step 1: “Letter of Engagement” is a professional requirement under Practice Guidelines of FPSB India. It is necessary to define the “Scope of Engagement” before beginning work on a client’s Financial Plan. The same is to mutually define and determine the activities that may be necessary in order to proceed with client engagement. The scope and limitation of the services of a CFPCM practitioner need to be disclosed in writing by him/her in the beginning itself. A CFP practitioner may not be proficient in executing all aspects of Financial Planning, e.g. a complex succession planning may be outsourced to a lawyer, and an evolved taxation issue may be got resolved through a tax expert or Chartered Accountant, a large portfolio of assets to be actively managed may be handed over to a portfolio manager. Such an arrangement should find an explicit mention in the Financial Plan for the said activity, and should be a part of the scope of engagement. Barring these specific incidents of other professionals’ facilitation, a CFP professional is trained to provide holistic services across all domains of personal finance. A marked difference from other professionals is that CFP practitioners abide by the Financial Planner Code of Ethics and Professional Responsibility. They pursue continuous professional development to remain conversant with current trends. Few essential features of the Letter of Engagement, are: i) Specific services to be included or excluded, such as implementation of the financial plan and its periodic review. ii) Your compensation arrangements with respect to the engagement, including fees to be paid by the client.




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iii) Existing conflicts of interest, including those involving compensation arrangements with third parties, and any future conflicts of interest if they occur. As mentioned in (i) above, the Financial Plan can be holistic that is covering all domains of finance (investment, financial management, insurance and risk management, retirement, taxation and estate) and all activities like planning, execution and review. However, the Financial Plan can be limited to few domains and services also. The disclosure by client about other professional engagements may not be a necessary part of the engagement letter. The maximum liability of the practitioner against the claims and complaints of the client is beyond the scope of the letter of engagement. Step 2: After defining and discussing with the client the basic terms of the Financial Plan construction, the next logical step is to collect quantitative and qualitative information of the client. The function of collecting qualitative information lays down the process of determining a client’s attitudes, expectations, financial experiences and the level of financial sophistication. Some inferential data like the risk appetite of the client can be drawn from this qualitative information.

• The client data can be obtained in a format, viz. Client Questionnaire. The scope of such Questionnaire or Data Sheet is to extract such information which may form the basis of any analysis to be carried out for determining the financial status of the client. Such information may pertain to assessing Client’s

a. Assets & Liabilities b. Cash Flow (Current Income & Expenditure) c. Investment profile d. Insurance adequacy e. Any Pension and Superannuation entitlements f. Any Estate Planning undertaken

a) The client data analysis should be aimed at identifying

a. Client’s risk tolerance b. Suitability of current investments as per the identified risk tolerance c. Gaps in insurance requirements d. A general tax efficiency in various financial deals e. Client’s likely financial goals in the currency of his/her active working life f. Expected nest egg (retirement corpus), if any, in normal course g. Client’s likely Estate discharges

Step 3: Assessing a client’s objectives, needs and priorities comes under the following core financial planning function comes under Analysis. Major activities under this step are to consider potential opportunities and constraints to develop strategies and to assess information to develop strategies. Evaluation and optimization of various strategies to choose the most appropriate comes under “Synthesis” within this step. As a part of




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this function, the Planner may identify other issues that may potentially impact client’s ability to achieve financial goals. The Financial Planner should analyze your information to assess your current situation and determine what you must do to meet your goals. Depending on what services you may have asked for, this could include analyzing your assets, liabilities and cash flow, current insurance coverage, investments or tax strategies. Identifying client’s various financial Goals

a. Education / Higher Studies of children b. Marriage of children c. Buying house property / additional house d. Buying a motor vehicle e. Starting a new venture f. Target nest egg (retirement kitty) g. Any other specific goal of client such as charity

Identifying general weaknesses in client’s situation and how they can affect his aspiration goals

a. Inability to accumulate savings because of cash flow problems, i.e. Expenditure > Income b. Inadequacy of risk coverage: life, assets and income protection c. Insufficient retirement funds d. Inefficient tax planning of investment, other cash flows e. Lack of wills / power of attorney / nominations /continuity in transitions of assets

Step 4: Developing Appropriate Strategies and Presenting the Financial Plan Client Risk Tolerance First Step of building a financial plan is the planner has to deal with risk planning. Planner helps the client to identify risks to which he is exposed to, and accordingly he has to construct a plan of action to provide adequate insurance against those risks. while taking insurance you should know that Under-insuring can be Highly damaging whereas Over-insuring can adversely affect the lifestyle of the client by reducing the available cash flow. The planner also needs to determine which insurance policy will be best for the client. Cash Flow Analysis and Modelling Through cash flow statement planner comes to know of how much potential savings client that is able to manage from income. Financial Planner Identifies various alternative strategies for achieving the client’s goals and objectives. During Evaluation of various strategies, planner may discuss with client the Importance, Priority and Timing of the client’s objectives and needs. This process may result in single, multiple strategies or no change to client’s current course of action.




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If the planner realizes that all goals and objectives of the client cannot be met then the client needs to reduce expenses by managing his / her lifestyle or the Client needs to look at increasing his income in order to increase savings or Some of the Financial goals could be sacrificed based on priority. Before developing recommendation, a Planner Identifies and evaluates all alternative strategies which can reasonably address the client’s objectives, needs and priorities. While presenting financial planning strategy to client, a CFP professional is most likely to explain assumptions/factors critical to the strategy and the related risks. Develop advice, wherever required, to strengthen the client’s position in sync with goals & prepare a

skeleton financial plan Address the concerns and queries that the client has raised after considering the skeleton financial

plan. This led a planner to the actual development of financial spreadsheets with detailed analysis culminating in a written financial plan

Present a well-documented draft financial plan for the client to review the same The client is required to be apprised of relevant regulatory section which discloses, in writing, the

details of all commissions and fees being charged to or paid by the client A ‘Statement of Advice’ in writing needs to be furnished to the client and enough time afforded to

the client to properly study the same prior to any transactions being executed The reference must be included on the areas where the planner needs to liaise with experts in the

field of insurance, investment, taxation, law, etc. in line with client’s focused objectives thereto However, the CFP Professional should avoid stating and asserting that the recommendations shall meet or achieve financial goals. Elements of Financial Plan: Five major elements that go into building the Financial Plan 1. Investment Planning: The core part of investment planning consists of deciding on an asset allocation strategy which is in line with the meeting the overall objectives of client. Asset Allocation means diversifying money among different types of investment categories. Asset Allocation is the primary basis which decides the rate at which grows in the long run. The various asset classes that an investor can invest in are:

a) Equity b) Debt c) Real Estate d) Precious Metals: Gold, Silver e) Commodities f) Alternative Investments Like Art, Currencies

Asset Allocation Strategy is primarily decided based on: a) Returns that need to be generated on the investments




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b) Risk profile of the client c) Time horizon of investing d) Personal circumstances of the client Once asset allocation strategy is decided planner needs to evaluate various investments options. Product selection is done based on evaluation Retirement Planning The Retirement planning is to ensure that client has same standard of living after retirement even in the absence of cash inflows in income form. For retirement planning planner needs to discuss the following aspects of retirement with client: The kind of lifestyle client wish to lead after retirement.

a) Helping client in setting realistic retirement goals b) Determining the total amount of money that a client needs for retirement c) The planner, as part of a financial plan, needs to create a clear strategy to create sufficient financial

resources to meet the retirement needs of the client.

Income Tax Planning

a) Tax Planning is all about using any allowable strategy to reduce and minimize tax liabilities. b) Tax Planning is supposed to be used as part of the overall strategy and not independently. c) The financial planner’s job is to help the client to minimize taxes, not to evade them

Estate Planning: The financial planner should ensure that the client makes a will and appoints an executor to his estate during his lifetime. He should also ensure that appropriate nominations for all assets are in place the financial planner should guide the client in setting up the distribution of his estate in a manner that minimizes the tax impact on the heirs. Drafting a Financial Plan The draft financial Plan would contain details of:

a) A list of all goals of the client b) Net Worth Statement c) Cash Flow Statement d) Risk Planning Sheet e) Calculations containing details of retirement planning f) Details related taxation and emergency fund g) Asset Allocation Strategy h) Working of Investment Plan i) Estate Planning




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Step 5: Implementation or execution of the Financial Plan should be well covered at the engagement level itself. However, few things can well change, e.g. the scope of the engagement, as originally defined; the conflicts of interest, previously disclosed; the sources of compensation and material relationships, previously disclosed, etc. However, the responsibility itself of implementing the recommendations cannot change at this stage. If engaged for only implementing recommendations, a CFP professional is not required to identify activities for sourcing/coordinating with other professionals. The Plan execution should be done in consultation and prior approval of the client. Any changes in the existing strategy must be got approved by the client after discussing all aspects and implication of altering the strategy. The Planner gains the client’s agreement on implementation of the recommendations and provides the required documentation. The planner’s responsibilities may include:

a) Identifying activities necessary for implementation. b) Determining respective responsibilities of the planner and the client. c) Referring to and coordinating with other professionals and sharing client information as authorized. d) Selecting and securing products and/or services for the client. e) If there are conflicts of interest, sources of compensation or material relationships with other

professionals that have not been previously disclosed, the planner discloses these to the client. The planner explains the rationale for referrals and the qualifications of referred professionals.

Implementation:

a) There needs to be a plan of action, it should lay out in sequence the tasks, decisions and assessments to be made along the way to financial success.

b) The plan should be clarified with the client. c) Implementing the financial plan is the most difficult step in the entire process. Client has to often

do multiple sacrifices. So, client needs constant motivation and prodding to implement the plan. d) The planner needs to remember that the client’s financial plan is worthless on paper but potentially

priceless, if implemented in true spirit.

Coordinate as necessary with other Professionals:

a) Coordinate as necessary with other professionals such as accountants, attorneys, real estate agents, investment advisors, stock brokers and insurance agents.

b) Technical experts know their fields very well and can suggest products tailored to the client’s objectives, resources and risk profile.

c) The planner needs to review the specialist’s proposal to make sure it fits the client’s needs and other parts of the financial plan.




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d) The planner should make sure that the specialist’s perspective ---aggressive or conservative----is compatible with the client.

Step 6: After implementing the financial plan process does not end, it is the continuous process where regular monitoring and periodic evaluation is necessary to ensure that things are happening as per the plan. When Monitoring a financial plan, the planner needs to evaluate the following points:

a) When was the plan written? b) What assumptions were made about the client’s financial condition and personal situation and the

general economy? How have these assumptions changes over time? c) Are assumptions changed over time? d) Are assumptions now more or less favorable? e) Does the planner expect the new assumptions to prevail long enough to make changes to the

financial plan?

Monitor and Evaluate Soundness of Recommendations: As plan is put into action, the planner should evaluate the sounds of recommendations implemented in meeting the goals and objectives of the client in case planner feels they are not line then he should communicate with client and help client to achieve his goals and objectives. Review the Progress of the plan with client - The review process may also include:

a) Confirming that the financial planning recommendations agreed on by the client and planner have been implemented

b) Assessing progress towards achievement of the objectives of the financial planning recommendation

c) Re-evaluating initial assumptions made by the financial planning professional for reasonableness d) Determining whether any adjustments are required in financial plan due to client’s circumstances e) Mutually agreeing on any changes that may be required f) Discuss and Evaluate changes in client’s Personal Circumstances (e.g. Birth/death, Age, Illness,

Divorce, Retirement) g) In India, tax laws undergo change almost every year. The planner may need to review these changes

and evaluate the impact that these changes have on the recommendations given to the client. h) Once the changing circumstances are evaluated the planner needs to work with client to modify the

plan accordingly. Planner should schedule periodic review sessions to evaluate the course of financial plan.




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Time Value of Money

• A sum of money received today is worth more than the same amount of money to be received a few years down the line. This is because inflation affects the value of money to depreciate with time. Not just inflation, the opportunity cost of money has a bigger concern here. Opportunity cost is the value of the next best choice that one gives up when making a decision. The ‘cost of capital’ or the ‘required rate of return’ are also criteria in order to evaluate future cash flows.

• Let us take here the required rate of return on a capital sum invested as the rate of discounting. If r

represents the rate of discounting over a specified time period, the present value of a sum of money C to be received n time periods is given by

PV = C / (1+r) ^n

• Thus, the Time Value of Money represents the current worth of a future sum of money (or stream of cash flows) given a specified rate of return known as the discount rate. The higher the discount rate, the lower the present value of the future cash flow(s).

• The Present Value of a sum of Rs. 1,000 to be received 1 year from now if the discount rate applied

is 12% is given by

PV = 1,000 / (1.12) = Rs. 892.86

• The PV of the same sum to be received 3 years from now at the same discount rate is PV = 1,000/ (1.12)^3 = Rs. 711.78

Financial Mathematics The skills in Financial Mathematics help an individual to distinguish and appreciate simple and compound rates of interest, nominal and effective rates and present value of a series of future payments, discounting and accumulation of a series of cash flows. These skills come handy in evaluation of a financial product in relation to the financial goal chosen. Compound interest: The essential feature of compound interest is that interest itself earns interest. The compound interest can be worked out using Excel formula. We shall have to use FV (Future Value) formula. On typing =FV (in a cell of Excel Worksheet, we get the following strip FV (rate, nper, pmt, [PV], [type]) ‘Rate’ has to be filled in decimals or a number %, e.g. 14% has to be written as either 0.14 or 14%.

The rate is applicable over the time. Rate is always synchronized with compounding factor i.e.14% p.a. is annual compounding then rate is also annual. However, if compounding is monthly or NPER (Number of period) factor is monthly then rate must be monthly effective.




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‘nper’ is the number of time periods, e.g. 5 in case of 5-year time span, 24 in case of monthly compounding time period in a 2- year time span, etc.

‘Pmt’ is the periodic investment made in each specified time period. In case of Outflow the value should be ‘negative’ sign. In case of Inflow the value should be in “positive” sign. In case of one-time Principal investment, it is to be taken as 0.

‘Pv’ is the present value of the investment made, i.e. Principal amount of initial/one-time investment. In case of Outflow the value should be ‘negative’ sign. In case of Inflow the value should be in “positive” sign.

‘Type’ is the ‘begin’ mode or ‘end’ mode, depending on Inflow/Outflow made at the beginning or end of each of the specified period. For ‘begin’ mode, we have to take 1, and for ‘end’ mode we have to take 0. The Begin/End mode only matters if there is value in PMT factor & answer will depend upon begin/End mode.

If payments are made at the beginning of each time period, they are said to be paid in advance or annuity due. Deposits in savings, rent payments, and insurance premiums are examples of annuities due. Loan repayments are always at end the end of month is taken in End mode.

Case 1: Mrs. Renu wishes to take a home loan in such a way that she should repay the loan in the next 12 years of her service tenure. She can afford an installment of up to Rs. 8,500 per month. The prevailing rate of interest of housing loan is 10% p.a. (compounded monthly). What loan amount she can target?

Solution: The Present value of monthly installments of Rs. 8,500 for 12 years at 10% p.a. (compounded monthly) shall be the amount of loan. Loan amount = 711250




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Case 2: Mr. Prabhat decides to take a car loan of Rs. 8 lakh for 5 years at 12.5% p.a. on reducing monthly balance of the loan outstanding. Find the Equated Monthly Installment (EMI) to be paid.

Solution: As the installments are being repaid on monthly intervals at the end of month, The PMT is to be found by using Excel formula = 17998

Case Study 3: The Insurance Company offers you a pension plan in which you will receive Rs. 20000 a year for first 10 years and Rs. 30000 a year for next 10 years after end of first 10 years. How much would you be willing to pay for these annuities, if applicable discount rate is 9% and annuities are paid at the end of each year?

Step 1: PV at 10 year for annuity receivable of Rs.30, 000 in 10th to 20th year




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Step 2: 192529 is PV at 10th year, take this value in FV & Calculate all inflow at current date = 209680

Nominal rate Vs Effective rate

a) The nominal interest rate is the periodic interest rate times the number of periods per year; for example, a nominal annual interest rate of 12% based on monthly compounding means a 1% interest rate per month (compounded).It may be noted that nominal rate of interest should always specify the period of compounding, or else the information is not complete. .

• Nominal interest rates are usually quoted for contractual rates, i.e. rates known or fixed in advance, e.g. bank deposit rates where the interest is paid on quarterly basis or loan rates usually mortgages, where the repayments are by way of monthly installments and interest is charged on reduced balances after every installment, thus rendering the rate monthly/quarterly compounded.

• Two nominal rates of interest are not comparable unless their compounding periods are the same. This anomaly is corrected and uniformity or ready comparability restored when we convert nominal rates to effective rates of interest, usually over a standard period of one year, thereby making a nominal rate of interest charged as annual effective rate of interest, or interest with annual compounding.

• Thus, a nominal of 12% p.a. compounded monthly will have an equivalent annual effective rate of

interest of i = ((1+(0.12/12))^12) – 1 = ((1.01) ^12) – 1 = 1.126825 - 1 = 0.126825 or 12.68% • A nominal of 12% p.a. compounded quarterly will have an equivalent annual effective rate of

interest of i = ((1+(0.12/4))^4) – 1




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= ((1.03) ^4) – 1 = 1.125509 – 1 = 0.125509 or 12.55% • A nominal of 12% p.a. compounded half-yearly will have an equivalent annual effective rate of

interest of i = ((1+(0.12/2))^2) – 1 = ((1.06) ^2) – 1 = 1.1236 – 1 = 0.1236 or 12.36%

# The annual effective rate of interest , say 12% p.a. compounding monthly can be found by the excel formula FV (rate, nper, pmt, pv, [type])

Here, rate is 1% monthly ,nper is 12, pmt is 0, pv is -100 and type 0. Thus, the following strip gives the annual effective rate of interest of 12%p.a. compounding monthly . FV(1%,12,0,-100,0) = 112.68 (it means 12.68% annual effective rate of Interest)

Thus, it is seen that higher the period of compounding for a nominal interest, higher the effective rate of interest over a definite time span.

In our practical day-to-day life, not many interest rates we encounter are contractual. They are rather indicative over a significantly long period of time. These may be long-term indicative returns on equity investments, debt/bond investments, etc. or yield of an annuity. But the corpus built over a long period may not necessarily be by way of annual installments. The installments may be of made quarterly or monthly. Or the annuity payments may be on monthly intervals.

It is of interest therefore to find the effective rate of interest over a small sub-period, say a month, corresponding to an indicative rate of interest (also effective) for a longer time span, say a year. This is necessary if the corpus is accumulated by way of investments made in each sub-period. Thus, in effect we need to find the effective rate of interest over the sub-period which corresponds to the interest rate over the longer time span.

Reworking the formula (1 + i) ^ (1/p) - 1

For example, for 12% p.a. compounded rate of interest, we may find effective interest rate over month, we get (1.12)^(1/12) -1=1.009489 - 1= 0.009489 or 0.95%

We may note that this monthly effective rate of interest is less than 1%.

• Similarly, we can find a quarterly effective rate of interest which corresponds to an annual effective rate of 12% p.a. We get (1.12)^ (1/4) -1=1.02874 - 1= 0.02874 or 2.87%

a) Again, we can observe that the corresponding nominal rates of interest for monthly compounding,

11.39% p.a. and for quarterly compounding 11.49% p.a. are less than the annual compounded rate of 12% p.a.

# The monthly effective rate equivalent to an annual effective rate, say 12% can be found by the excel formula RATE (nper, pmt, pv, [fv], [type], [guess])




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Here, nper is 12, pmt is 0, pv is -100, fv is 112 and type 0. Thus, the following strip gives the monthly effective rate of interest equivalent to an annual effective rate of interest of 12%. Rate(12,0,-100,112,0) = 0.9489% p.m. Note that it is less than 1% p.m.

Case Study 4: Mr. Hariharan has accumulated nest egg of 50 lakh on his retirement age 60. He invests this accumulated corpus in a pension plan of life Insurance Company. He requires monthly annuity of Rs. 60, 000 for his family needs from the end of one month of initial deposit. Expected return on investment is 10%. For how many completed months can he receive this annuity by investing in the said pension plan?

Ans: 137.50 months

Case 5: Mr. Kunal verma desires to target a pension of Rs. 1 lakh per month for 15 years once he retires. If he invests the corpus collected for his retirement in a 9% yielding annuity, find the corpus to be targeted. (Assume pension start from beginning of retirement)

Solution: (i) Here, we have to find the PV of a stream of monthly payments of Rs. 1 lakh continuing for 180 months (15 years) if the effective annual rate of return for the investment vehicle chosen is 9%.

(ii) The rate of return in our Excel formula shall be taken on a monthly effective basis because after every installment of pension withdrawal the force of interest shall work on the outstanding amount of corpus at that point. We get the required rate by working out (1+0.09) ^ (1/12)-1 = 0.007207

(iii) The PV is given by =PV (rate, nper, pmt, [fv], [type]), that is 1,01,38,168




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Case 6: Mr. Subash has amassed a nest egg of Rs. 74.80 lakh which he utilizes to buy him a monthly pension for 20 years. He wants to leave Rs. 30 lakhs at the end of the pension period. If he buys the annuity which yields 10.75%, what amount of level monthly pension he should opt for? (Assume pension start from beginning of retirement)

Solution: Retirement Corpus 74.8 lakh at retirement age is inflow to buy an annuity plan. PV should be in negative sign. Legacy planning of Rs. 30 lakhs is outflow & required to put in positive sign in FV.

Case 7: Ms. Jayanti Nair, currently 30, wants to create a corpus of Rs. 2 crores for her retirement at the age of 55 years. She currently has a balance of Rs. 1.47 lakh in an investment vehicle which in future is expected to yield 12% p.a. What amount of monthly contribution should Ms. Nair aim to set aside every month with immediate effect in the same investment vehicle in order to achieve the desired target corpus?




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Solution: Existing investments 147000 at age of 30 is inflow accumulate retirement corpus. PV should be in negative sign. Corpus required at age 55 is outcome of all investments at amounted Rs. 2 Cr required to put in positive sign in FV= 10281 monthly.

Inflation adjusted or Real rate of Return

Inflation-adjusted return reveals the return on an investment after removing the effects of inflation.

Example: When retirement corpus is calculated at the retirement age for post-retirement years, at one side corpus investment give return and on other side inflation increase the required expenses in post-retirement years, in such scenario real rate of Interest is calculated by formulae

Real rate of return = ((1+ rate of return on Investment)/ (1+Inflation rate)) -1

Example: Aamir invested in a MF which is yielding 12% p.a. What is the real rate of return from the MF, if

the inflation during the same period is 8% p.a.?

Net Present Value

• Determining the appropriate discount rate is the key to properly valuing future cash flows that could be earnings or obligations.

• The Net Present Value is the sum of present values of all future cash flows taking into account all

present and future outflows also. If C0, C1, C2, ………,Cn represent the cash flows at time periods 0 (present), 1, 2,……..,n, the Net Present Value of NPV is given by the following expression NPV = C0 + C1 / (1+r) + C2 / (1+r)^2 + ……..+ Cn / (1+r)^n




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• Here, outflows shall take negative sign, e.g. for a one time outflow at the present time (i.e. time 0) , the expression will take - C0 while all cash inflows starting from time periods 1,2,……,n will take positive sign.

• If NPV is positive for a given discount (i.e., a required rate of return) for an investment made at time 0, it is worth making the investment.

Case 8: For an investment of Rs. 10,000 made today, future cash inflows are Rs. 2,000 at the end of 1st year, Rs. 3,000 at the end of 2nd year, Rs. 4,000 at the end of 3rd year and a final inflow of Rs. 5,000 at the end of 5th year. For a required rate of return of 10% p.a., evaluate the investment. Solution: NPV = -10,000 + (2000 / 1.10) + (3,000 / 1.10^2) + (4,000 / 1.10^3) + (5,000 / 1.10^5) = -10,000 + 1,818.18 + 2,479.34 + 3,005.26 + 3,104.61 = 407.39 As the NPV of cash flows from the standpoint of 10% p.a. required return is positive, the investment is worth making.

Internal rate of return

• If we equate the Net Present Value expression to zero, i.e.

NPV = C0 + C1 / (1+r) + C2 / (1+r)^2 + ……..+ Cn / (1+r)^n = 0

On solving the equation for r, we get the Internal Rate of Return (IRR) or the yield for a given cash flow stream. Therefore, the IRR for an investment is the discount rate that makes the net present value of the investment's income stream total to zero.

A project is a good investment proposition if its IRR is greater than the rate of return that could be earned by alternate investments of equal risk. Thus, the IRR should be compared to any alternate costs of capital including an appropriate risk premium. In the context of savings and loans the IRR is also called the effective rate of interest.

Case 9: For an investment of Rs. 10,000 made today, future cash inflows are Rs. 2,000 at the end of 1st year, Rs. 3,000 at the end of 2nd year, Rs. 4,000 at the end of 3rd year and a final inflow of Rs. 5,000 at the end of 5th year. Calculate internal rate of return from this investment.

Solution: We can make use of Excel formula of IRR for solving the equation for the value of r. On typing =IRR (in any cell will generate the following strip IRR (values, [guess]). Now we shall have the following values as annual cash flows, i.e. C0, C1, C2, C3, C4 and C5. Here, C0 is the investment made in the beginning, is an outflow and shall take negative sign.

-10,000 2,000 3,000 4,000 0 5,000

Taking these values in either successive cells in a column or in a row and enclosing them in a range in place of values in the above strip, we instantly get the IRR as 11.48%.




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XIRR: This Excel function is used when cash flows are on different dates or the periodicity (interval) in flows is same. Then CAGR is calculated by using this formula.

Case 10: Vivek wants to invest for the higher education of his two children Abhinav and Chinmay. The cost currently is Rs. 1,50,000 per year per child and has been increasing at 6% per year. Abhinav and Chinmay are of age 12 and 8 respectively and will need higher education for four years beginning at age 18. How much should Vivek save each month, beginning today for the next six years in an investment vehicle yielding post-tax 9% p.a. to finance education for both the children?

Solution: We shall solve the case in the following steps: Step 1: We need to find the outlay on education in the years of requirement at the then prevailing prices, i.e. after accounting for inflation. Step 2: We need to discount the outlays in individual years to the present-day values at the rate of investment chosen. The sum of these values is the Present Value of total required outlay on education. Step 3: This PV along with the monthly effective rate of interest on investment, the total tenure (nper) of investment in months will be used in finding the monthly investment (pmt) required. The calculations will be as follows: Age of Outlay in PV Age of Outlay in PV Abhinav the year Chinmay the year 12 8 13 9 14 10 15 11 16 12 17 13 18 Abhinav=1.5X(1.06)^6 A/(1.09)^6 14 19 Abhinav=1.5X(1.06)^7 B/(1.09)^7 15 20 Abhinav=1.5X(1.06)^8 C/(1.09)^8 16 21 Abhinav=1.5X(1.06)^9 D/(1.09)^9 17 Chinmay=1.5X(1.06)^10 E/(1.09)^10 18 Chinmay=1.5X(1.06)^11 F/(1.09)^11 19 Chinmay=1.5X(1.06)^12 G/(1.09)^12 20 Chinmay=1.5X(1.06)^13 H/(1.09)^13 21

On taking total of all individual PV amounts, we get the PV of whole payment stream as Rs. 9,22,407.50

Step 3 - We shall calculate the monthly investment required to meet this liability. We shall use the formula =PMT (rate, nper, pv, [fv], [type]) where as= (1.09)^(1/12)-1 = 0.007207 or 0.7207% effective monthly

nper= 72 months, pv= - 9,22,407.50, [fv]= 0, [type]= 1 We get pmt= Rs. 16,348.73




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Post office saving schemes A post office offers various types of deposit schemes for those who want to invest their money. These are also known as small savings schemes. The USP of these schemes is their sovereign guarantee, i.e., it is backed by the central government. Some of these schemes such as NSC also offer tax-saving benefits under section 80C of the Income-tax Act. The interest rate offered on these schemes are reviewed and fixed quarterly by the government.

National Saving Certificates (NSC)

Minimum investment Rs. 500/- No maximum limit. Interest applicable compounded yearly and paid at the end of term along with principal & time

period of scheme is 5 years. In 2011 govt. also introduce NSC of 10-year duration. Two adults, Individuals, and minor through guardian can purchase. No pre-mature encashment. Annual interest earned is deemed to be reinvested and qualifies for tax rebate for first 4 years under

section 80 C of Income Tax Act. Maturity proceeds not drawn are eligible to Post Office Savings account interest for a maximum

period of two years. Facility of reinvestment on maturity. Certificate can be pledged as security against a loan to banks/ Govt. Institutions. Certificates are transferable from one person to another person before maturity. Tax Saving instrument –Deduction under section 80 C of Income Tax Act. Interest income is taxable but no TDS

Post office 5-year Recurring Deposit

Minimum Investment of Rs. 10 per month and in multiple of Rs. 5 thereafter payable before end of calendar month.

Scheme is for 5 year & continuation of scheme for 5 more years with an option of with or without deposits.

Interest applicable payable quarterly & Interest is taxable

Post Office Monthly Income Saving Scheme:

Applicable Interest rate payable monthly. Maturity period is 5 years. Minimum investment amount is Rs.1500/- or in multiple thereof. Maximum amount is Rs. 4.5 lacs in single account and Rs. 9 lacs in a joint account.




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Account can be opened by an individual, two/three adults jointly and a minor through a guardian. A minor having attained 10 years of age can open an account in his/her own name directly. Minor has a separate limit of investment of Rs. 3 lacs and the same is not clubbed with the limit of guardian.

Facility of automatic credit of monthly interest to saving account if accounts are at the same post office.

Facility of premature closure of account after one year. Extension of A/c after defined period is not allowed. Maturity proceeds not drawn are eligible to

saving account interest rate for a maximum period of two years. Deduction under section 80 C not admissible. Most suitable scheme for senior citizens and for those who need regular monthly income.

SUKANYA SAMRIDDHI ACCOUNT

Objective: To promote the welfare of Girl Child

Who can open the account: A natural/ legal guardian on behalf of a girl child

Maximum number of accounts: Up to two girl children or three in case of twin girls as second birth or the first birth itself results in three girl children

Minimum and Maximum Amount of Deposit: Min.1000 of initial deposit with multiple of one hundred rupees thereafter with annual ceiling of Rs.150000 in a financial year

Tenure of the Deposit: 21 years from the date of opening of the account

Maximum period up to which deposits can be made: 15 years from the date of opening of A/c.

Partial withdrawal, maximum up to 50% of balance standing at the end of the preceding financial year can be taken after Account holder’s attaining age of 18 years.

Interest on Deposit: As notified by the GOI, compounded annually with option for monthly interest pay-outs to be calculated on balance in completed thousands.

Tax Rebate: As applicable under section 80C of the IT Act, 1961. In the latest Finance Bill, the scheme has been extended Triple exempt benefits i.e. there will be no tax on the amount invested, amount earned as interest and amount withdrawn.




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Inflation Indexed Bonds

Inflation Indexed Bond (IIB) is a bond issued by the Sovereign, which provides the investor a constant return irrespective of the level of inflation in the economy. The main objective of Inflation Indexed Bonds is to provide a hedge and to safeguard the investor against macroeconomic risks in an economy. The coupons are small 1.4% - 1.5%, but are paid every year on the indexed face value.

For understanding the concept of IIB, it has to be compared with the instrument of fixed deposits with the bank. While fixed deposit offers a fixed rate of interest for the investment for a given number of years, it does not protect the investor from the erosion of real value of the deposit due to inflation. IIB on the other hand, gives a constant minimum real return irrespective of inflation level in the economy. Capital increases with the inflation, so actual interest is better than originally promised. In case of deflation, interest payments decrease with the negative inflation. However, capital does not decline below the face value, i.e. Initial investment, in case of deflation.

Thus, inflation component on principal is not paid with interest but the same is adjusted in the principal. At the time of redemption, adjusted principal or the face value, whichever is higher, would be paid. If adjusted principal goes below the face value due to deflation, the face value would be paid at redemption and thus, capital will get protected. Interest rate will be provided protection against inflation by paying fixed coupon rate/interest rate on the principal adjusted against inflation.

Kisan Vikas Patra (KVP) :

Kisan Vikas Patra (KVP) is a savings scheme available at India Post Offices in the form of certificates. It is a fixed rate small savings scheme designed to double your investment after a predetermined period of time (113 months in the currently available issue). KVP is a fixed return scheme backed by the government that offers guaranteed returns. Certificates are currently available in denominations of Rs. 1,000, Rs, 5,000, Rs. 10,000, and Rs. 50,000. Eligibility criteria for investing in the KVP scheme:

a) The applicant has to be an adult resident of India. b) A parent/guardian may invest on behalf of a minor. c) Hindu Undivided Families (HUFs) and Non-Resident Indian (NRIs) cannot invest in Kisan Vikas Patra.




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Sovereign Gold Bonds Sovereign Gold Bonds are Government securities denominated in multiples of gram(s) of gold. They are substitute for investment in physical gold. These Bonds are issued by the Reserve Bank of India on behalf of the Government of India and are traded on stock exchange. Eligibility for Investment:

The Bonds under this Scheme may be held by a person resident in India, being an individual, in his capacity as such individual, or on behalf of minor child, or jointly with any other individual. The bond may also be held by a Trust, HUFs, Charitable Institution and University. “Person resident in India” is defined under section 2(v) read with section 2(u) of the Foreign Exchange Management Act, 1999

Form of Security

The Bonds shall be issued in the form of Government of India Stock in accordance with section 3 of the Government Securities Act, 2006. The investors will be issued a Holding Certificate (Form C). The Bonds shall be eligible for conversion into de-mat form.

Denomination

The Bonds shall be denominated in units of one gram of gold and multiples thereof. Minimum investment in the Bonds shall be one gram with a maximum limit of subscription of 4 kg for individuals, 4 kg for Hindu Undivided Family (HUF) and 20 kg for trusts and similar entities notified by the government from time to time per fiscal year (April – March), provided that

• in case of joint holding, the above limits shall be applicable to the first applicant only; • annual ceiling will include bonds subscribed under different tranches during initial issuance by

Government and those purchased from the secondary market; and • the ceiling on investment will not include the holdings as collateral by banks and other Financial

Institutions.

Issue Price

The nominal value of the Bonds shall be fixed in Indian Rupees fixed on the basis of simple average of closing price of gold of 999 purity published by the India Bullion and Jewelers Association Limited for the last 3 working days of the week preceding the subscription period. The issue price of the Gold Bonds will be ₹ 50 per gram less than the nominal value to those investors applying online and the payment against the application is made through digital mode.


http://rbidocs.rbi.org.in/rdocs/content/pdfs/05HOLDING08102018_C.pdf



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Interest

The Bonds shall bear interest from the date of issue at the rate of 2.50 percent (fixed rate) per annum on the nominal value. Interest shall be paid in half-yearly rests and the last interest shall be payable on maturity along with the principal. Coupon rate could be changed from series to series. In 2019 series Interest rate was 2.75%. No Tax is deducted at source on these coupon payments.

Payment Options

Payment shall be accepted in Indian Rupees through cash up to a maximum of ₹ 20,000/- or Demand Drafts or Cheque or Electronic banking. Where payment is made through cheque or demand draft, the same shall be drawn in favor of receiving office.

Redemption & Tradeable

• The Bonds shall be repayable on the expiration of eight years from the date of issue of the Bonds. Pre-mature redemption of the Bond is permitted from fifth year of the date of issue on the interest payment dates.

• The redemption price shall be fixed in Indian Rupees and the redemption price shall be based on simple average of closing price of gold of 999 purity of the previous 3 working days, published by the India Bullion and Jewelers Association Limited. Investors will earn returns linked to gold prices

• Tradable on National Stock Exchange of India Limited after Issue date as per date specified by RBI

• Loan can be availed with the pledge of these units.

Tax Treatment

• Interest on the Bonds shall be taxable as per the provisions of the Income-tax Act, 1961. The capital gains tax arising on redemption of SGB to an individual has been exempted.

• The indexation benefits will be provided to long term capital gains arising to any person on transfer of bond after 3 years and taxable at the rate of flat 20% with applicable cess.

• Interest received in form of Coupon is taxable at Slab rates. • Holding period less than 3 years is considered as Short term capital gain and taxable at slab rates




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Gold ETF’s

Gold Exchange Traded Funds (ETFs) are simple investment products that combine the flexibility of stock investment and the simplicity of gold investments. ETFs trade on the cash market of the National Stock Exchange, like any other company stock, and can be bought and sold continuously at market prices. Gold ETFs are passive investment instruments that are based on gold prices and invest in gold bullion. Because of its direct gold pricing, there is a complete transparency on the holdings of an ETF. Further due to its unique structure and creation mechanism, the ETFs have much lower expenses as compared to physical gold investments. At the time of NFO, after subscription of units by Investors, AMC purchase physical Gold & kept with Custodian. Gold ETF tax treatment is long term capital gain after 3 years with indexation benefit and short term capital gain at slab rates. No STT is applicable when you buy – sell these units on Stock exchange. Gold Monetization Scheme (GMS) Gold Monetization Scheme was launched by Government of India in 2015, under this scheme one can deposit their gold in any form in a GMS account to earn interest as the price of the gold metal goes up. The benefits of gold monetization scheme are: Mobilize idle gold: The scheme will help in mobilizing gold that has been lying idle in the confined spaces of households, trusts, and other institutions in India. The movement of gold in the national market will further benefit the Indian gems and jewelry sector which is a major contributor to India’s exports. Earn interest: Gold lying in your bank lockers or household does not earn you anything. In fact, when you store gold in a bank locker, it costs you bank locker charges to keep it safe. The gold monetization scheme will help you earn interest on your gold deposits, which will add to your savings. Enjoy tax benefit: The earnings on the gold monetization scheme are exempted from capital gains tax, wealth tax, and income tax. Even when the value of your gold deposit appreciates, capital gains tax will not be levied on it or on the interest you earn from it. Get flexibility on redemption: The gold depositor has the option to take either cash or gold on redemption. However, the redemption preference has to be mentioned at the time of deposit. Reduce the government’s reliance on gold imports: The mobilized gold will also supplement the RBI’s (Reserve Bank of India) gold reserves. It will also help the government in reducing the Government’s cost of borrowing. In the long run, it is also expected to decreases India’s dependency on gold imports.


https://www.paisabazaar.com/gold-rate/commonly-asked-questions-on-gold-monetisation-scheme/



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Mortgage Mortgages are secured loans that are specifically tied to real estate property, such as land or a house. The property is owned by the borrower in exchange for money that is paid in instalments over time. Home Equity Home equity is the market value of a homeowner’s unencumbered interest in their property. A simple formula for determining home equity is to subtract the amount of the mortgage balance and all liens on the home from the current fair market value of the home. If the home has been appraised for 3,000,000 and the outstanding balance on the mortgage is 1,250,000, the equity in the home is 1,750,000. It creates a lien against the borrower’s house and reduces the actual home equity Home equity loans are secured loans where the home acts as the collateral. In the event that the borrower defaults, the creditor can take possession of the asset used as collateral and sells it to satisfy the debt by regaining the amount originally lent to the borrower. Types of mortgages Simple Mortgage: Suppose Mr. X borrows money by doing a simple mortgage of his property. In this case, Mr. X (Mortgagor) would assign the property to the lender (Mortgagee). Here there is no transfer of possession of Mr. X’s property to the lender. It is under mutual agreement that in case of non-payment by Mr. X to the mortgagee within the specified time, the mortgagee can cause the mortgaged property to be sold in accordance with law and have the sale proceeds adjusted towards the payment of the mortgage money. Mortgage by Conditional Sale: Suppose Mr. X borrows money by mortgaging his property under mortgage by conditional sale, then the possession of the property is transferred to the lender. However, the sale becomes absolute only in case Mr. X defaults on his mortgage. In case Mr. X repays the mortgage loan, the sale of the property becomes void and the ownership is transferred back to Mr. X. Usufructuary Mortgage: In this type of mortgage, by an express or implied term, the mortgagor gives possession to the lender and gives him rights to accrue the rents or income coming from that property towards repayment for interest and mortgage money till the time repayment is complete. There is no time limit for payment of the mortgage money. Leasing A lease is a long-term agreement to rent equipment, land, buildings or any other asset. In return for most—but not all—of the benefits of ownership, the user (lessee) makes periodic payments to the owner of the asset (lessor). The lease payment covers the original cost of the equipment or the asset and provides the lessor a profit.




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Financial Lease: Financial leases are most common by far. A financial lease is usually written for a term not to exceed the economic life of the equipment. A financial lease would usually consist of:

a) Periodic payments need to be made b) Ownership of the equipment reverts to the lessor at the end of the lease term c) The lease is non-cancellable and the lessee has a legal obligation to continue payments to the end of

the term d) The lessee agrees to maintain the equipment

In case of a financial lease, the lessee must record the leased item as an asset on his/her balance sheet and record the present value of the lease payments as debt. The lessor must record the lease as a sale on his/her own balance sheet. Operating Lease: The Operating lease, or “maintenance lease”, can usually be cancelled under conditions spelled out in the lease agreement. Maintenance of the asset is usually the responsibility of the owner (lessor). Computer equipment is often leased under this kind of lease. Sale and Leaseback The Sale and leaseback is similar to the financial lease. The owner of an asset sells it to another party and simultaneously leases it back to use it for a specified term. This arrangement lets you free the money tied up in an asset for use elsewhere. You’ll find that buildings are often leased this way. Hire purchase In cases where a buyer cannot afford to pay the asked price for an item or property as a lump sum but can afford to pay a percentage as a deposit, a hire-purchase contract allows the buyer to hire the goods for a monthly rent. When a sum equal to the original full price plus interest has been paid in equal instalments, the buyer may then exercise an option to buy the goods at a predetermined price (usually a nominal sum) or return the goods to the owner. Hire purchase differs from a mortgage and similar forms of lien-secured credit in that the so-called buyer who has the use of the goods is not the legal owner during the term of the hire-purchase contract.




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Intro to Financial Planning - Questions for Practice

EMI & Interest rate calculation

1. Vikas, aged 45, wants to refinance his existing housing loan of Rs. 4.60 lakh which is on floating rate of interest 10%p.a.and has outstanding term of 20 years. He wants to repay this outstanding loan by the time he retires at 60 years of age. He also wants to avoid the uncertainty of floating rate of interest and would like to convert into fixed rate of interest which is available at 50 basis points more than his current floating rate of interest for the required term. Prepayment charges for closure of existing loan is 3% and processing fee for new loan is 1%. What will be his new EMI? (Assume all charges are to be added in new loan amount)

a) 5290 b) 5084 c) 5238 d) 5350

2. Sushil has told you that one of his friends is requesting him for a cash loan of Rs. 50,000 which will be repaid in ten equated monthly installments of Rs. 5,500 beginning after a month after the date of disbursement of loan. He wants to know the annualized effective rate of return underlying this transaction. According to you the same is __________________.

a) 21.25% b) 23.46% c) 26.16% d) 29.53%

3. Vinod wants to go abroad on a family vacation tour. A tour operator is offering him a package in which he has to pay only Rs. 20,000 which is 10% upfront amount, while the remaining amount is to be repaid in 36 EMIs of Rs. 7,500 each, first EMI payable after one month. He wants to know the annual effective rate of interest which he may incur in subscribing to this offer.

a) 24.10% p.a. b) 27.00% p.a. c) 32.61% p.a. d) 28.56% p.a.

4. Today is 30th March 2011; Sushma took personal loan at 17% p.a. rate of interest (reducing monthly

balance basis) for tenure of 39 months. The installments are payable on the 1st of every month.

Principal amount of loan outstanding was Rs. 1.07 Lakh as on 1st March, 2011 pursuant to payment of installment. Eight installments are yet to be paid. The foreclosure charges are 2% of the amount outstanding. She receives a good amount of Bonus from her company. She wants to fore-close this loan




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today. She wants to know from you, what is the annual effective return generated by her by fore-closure of loan today, instead of regular payment of EMI’s on due date.

a) 5.34% b) 8.13% c) 10.48%

5. A personal loan of Rs. 3 lakhs is availed on credit card at 14% p.a. interest for tenure of 2 years. The credit card company charged processing fees of 1% of the loan amount. The interest on monthly reducing balance basis was charged in the credit card. What is the annual effective cost paid in this transaction?

a. 13.8% b. 18.7% c. 16.10%

6. Prabu’s Debt Mutual Fund portfolio has generated returns of 11% per annum. He wants to know the actual return of his portfolio, after tax and inflation, if his income tax slab is 30% and rate of Inflation is 6% p.a. (Indicate nearest figure).

a) 1.60% p.a. b) 1.70% p.a. c) 4.70% p.a. d) 3.50% p.a.

7. Mr. A has invested in an instrument for three years. The instrument has produced a return of 11%,15% and 12% in the three years. You as Mr. A’s advisor have observed that the ruling inflation in these three years respectively was 4%,7% and 8%. You find the real rate of return which Mr. A has received as ______. (a) 5.65% p.a. (b) 7.08% p.a. (c) 5.96% p.a. (d) 6.32% p.a.

8. Recently a nationalized bank announced its 600-day Fixed Deposit with Interest compounded quarterly. Surinder is keen to invest in this FDR. You want to assess the real rate of return in this FDR keeping in view the prevailing inflationary trend, and advise him to have at least 4% p.a. real rate of return. Keeping this in view, at what rate of interest this FDR is attractive enough for him to invest? (Rate of inflation is 6%)

a) 9.8 % p.a. to 9.9% p.a. b) 10.2% p.a. to 10.3% p.a. c) 10% p.a. to 10.1% p.a. d) 9. 60% p.a. to 9.70% p.a.

9. Sushant has received offer to invest in New Fund Offers of open-end equity growth schemes ABC and

PQR of two Mutual Funds. The schemes have same investment objectives and other features, except




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in the Fund Management Charges (FMC), which is 2.25% p.a. for ABC and 1.50% p.a. for PQR. Sushant is not able to appreciate as to what difference this would make in the end analysis. You advise that if He makes an investment of Rs. 5,000 each per month for twenty years in ABC and PQR, and assuming that both funds generate same pre-FMC return, say 12%, year after year, and the accumulated amount in PQR will be ______% higher than that of ABC after twenty years.

a) 10.06 b) 9.14 c) 9.31 d) 10.31

IRR or CAGR Calculation

10.During identification of new business opportunities, one of Surinder’s friends Gaurav has offered him a business proposal Surinder shall take the franchise of a company which is a reputed brand in the field of pathology lab. Franchise rights shall be valid for 5 years and the project requires an upfront investment of Rs. 25 lakhs for required infrastructure. The franchisee agreement has an option that the company can take over the franchisee after 5 years by charging depreciation @15% p.a. on the straight-line basis. The projected profits from the business are as follows:

Year 1 3.50 lakh Year 2 4.74 lakh Year 3 5.17 lakh Year 4 6.35 lakh Year 5 7.10 lakh

Surinder wants to know what IRR he will earn on his investment from this project. (Please ignore taxes and assuming no additional investment is made during this five-year period)

a) 8.20% b) 5.17% c) 7.82%

11. Govind invested Rs. 20 lacs in HDFC Equity Fund (Dividend option) on 1st April 2007, at a price of Rs. 21.129 / unit. The Fund has been a good performer, and declared dividends of

Rs. 3 / unit on 30 Nov, 2007, Rs. 5 / unit on 17 Mar, 2009 and Rs. 5 / unit on 7 Mar, 2010 The current price of HDFC Equity Fund (as on 30 Apr, 2010) is Rs. 56.35 / unit. What has been the annualized return of Govind’s investment so far?




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a) 47.33% b) 52.81%

12. Vinod was allotted 10,000 units of a Mutual Fund scheme at Rs. 10.00 per unit on 23rd October 2005. He chose dividend reinvestment option. He received dividends on 24th October 2006 @Rs. 1.65 per unit (reinvested at NAV of Rs. 10.47), on 8th May 2007 @Rs. 1.80 per unit (reinvested at NAV of Rs. 11.84) and on 23rd December, 2007 @Rs. 2.00 per unit (reinvested at NAV of Rs. 11.28). Vinod redeemed all the units on 23rd March 2009 at Rs. 9.04. He wants to know the annual rate of return he earned on the investment? (Please ignore charges and Taxes if applicable)

a) 10.79% p.a. b) 9.52% p.a. c) 11.18% p.a.

Education & Marriage Goal Planning

13. Vishal, aged 46 years and Aditi, aged 43 years, they have a son Ajay, aged 16 years and a daughter Priti, aged 12 years. Vishal has been investing Rs. 35,000 in an Equity mutual fund scheme in the beginning of each year from last 10 years. Each child will spend 3 years at college, starting from their respective age 21 years. The current cost of higher education in college is Rs. 2.5 Lakh p.a. for each child. Vishal wants to know the amount he should be investing in the beginning of every month, starting immediately and up to date of the first withdrawal, to pay for his children’s higher education requirements. (Inflation -6% pa, return on equity MF scheme – 12% pa)

a) Rs. 7,853 b) Rs. 8,840 c) Rs.6,183 d) Rs. 8,942

14. Vikas has two children Sonu (aged 5 years) and Monu (aged 2 Years). He wants to invest yearly to achieve his goals for his children's higher education for both children at their age of 21 in lump sum; presently valued at Rs. 3 Lakh each. For accumulation of fund you recommend Vikas to invest in Debt and Equity in the ratio 20:80. If Vikas starts investment from today, what approximate amount should he set aside every year to achieve his said goals? Assume Vikas maintains separate investment accounts for Sonu and Monu and invests till they turn 21 years of age respectively. (Inflation rate - 4%, rate of return on equity -15% p.a., rate of return on debt -9% pa)

a) Rs. 9,000 and Rs. 8,000 respectively b) Rs. 9600 and Rs. 7,000 respectively c) Rs. 8,000 and Rs. 7,000 respectively d) Rs. 10,000 and Rs. 8,000 respectively




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15. Anita wants to invest monthly for her son Rajesh’s (aged 11 years) Higher education when he turns age of 21. She will make investment of Rs. 2500 p.m. till the age of 15 and thereafter Rs. 4000 pm till he turns age of 21. Present cost of higher education is Rs. 5 lakh which is expected to escalate at the rate of 12% p.a. You have advised her to invest monthly in Debt MF and Equity MF in the ratio of 30: 70 till Rajesh turns age of 17. Thereafter, further investments are made in Debt MF and Equity MF in the ratio of 60: 40. Anita wants to know, how much additional amount she needs to invest monthly, starting from today, till Rajesh turns age of 21. (Assume Equity return – 14%, Debt return 9% pa)

a) Rs. 3,650 b) Rs. 3,575 c) Rs. 3,500 d) Rs. 3,425

16. Today’s date is 1st April 2015. Current Age of Ramesh is 4 years. And current age of Govind is 1 year. Education expenses are required for each child at their respective age of 18 (Rs. 4 lakhs at current cost) and for four subsequent years (Rs. 3 lakh p.a. at current cost). Expenses escalate at 5.5% p.a. All withdrawals are made in the beginning of the financial year. This goal is provided for by investing monthly an amount at 11% p.a. with immediate effect up to one year prior to the initial expenses required for the elder child. Find this monthly investment.

a) Rs. 14,730 b) Rs. 15,520 c) Rs. 16,600

17. Ravi and Anita want to invest Rs. 20,000 p.m. jointly. Starting from today, Ravi wants to invest this amount into an investment product, which doubles the investment amount in 8 year 7 months. They want to invest Rs. 20,000 in this product every month till a month before the first maturity receipt of their investment. The maturity amount of such investment product shall be reinvested in a balanced Mutual fund scheme generating 0.75% return per month. Ravi wants to know the accumulated amount of funds at the time of last maturity receipt of invest product with them to fund her daughter’s marriage. According to you the same is ________________.

a) Rs. 63,14,378 b) Rs. 62,27,373 c) Rs. 61,81,015 d) Rs. 61,41,015

18. Surinder, aged 42 years, has one daughter Divya, aged 5 years. He will need Rs. 15 lakhs in present terms for the marriage of their daughter Divya, when she turns age of 24.

You suggest him to invest Rs. 1 Lakh every year in NSC’s from today to the date till Divya turns 19 years of her age. The maturity proceed of each NSC is reinvested in debt mutual fund scheme. He asks you whether,




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with the amount thus accumulated, he would be able to achieve the goal of Divya’s marriage, or there could be a shortfall in meeting such expenses. (Assume Rate of Inflation 6% p.a., return on debt MF 7.5 %, NSC – 8.4%)

a) Surplus of Rs. 1,98,240 b) Shortfall of Rs. 6,29,160 c) Surplus of Rs3,40,500 d) Shortfall of Rs. 7,48,143

19. Ramakant has invested maximum allowable amount in POMIS on 1st Dec 2011. He intends to invest interest from this POMIS in Gold ETF which is expected to give an average monthly return of 0.75% p.m. (net of expense).

Calculate total amount received on POMIS maturity along with Gold ETF value. (Assume Interest rate on PO MIS is 8.2%)

a) Rs. 6,81,930 b) Rs. 7,35,021 c) Rs. 6,98,372

20. A business man wants to achieve the goal of marriage of his daughter after 10 years. The funds required would be Rs. 25 lakh at then costs. He wants to invest monthly for the goal. You suggest an asset allocation strategy where he should invest monthly in equity and debt in ratio 65:35 for 9 years, and shift the entire accumulated amount in these funds to liquid fund in the last year. If the returns expected from equity, debt and liquid funds in this period are 12 % p.a., 9 % p.a. and 5 % p.a., respectively, what approximate amount per month is required to be allocated to equity and debt schemes? a) Rs. 12,679 & Rs. 8,453 b) Rs. 9,485 & Rs. 6,323 c) Rs. 8,601 & Rs. 4,631 d) Rs. 12,075 & Rs. 8,05 21. Your Client start investing Rs. 12,000 per month a year ago in an asset allocation of 30:70 in equity and debt to achieve a goal in 6 years from now. You realize that he would be requiring Rs. 15 lakh for the same goal. You expect equity and debt to give returns of 11.75% p.a. and 8.25% p.a., respectively in the entire period of investment. You assess changing asset allocation to 65:35 in equity and debt by investing Rs. 2,000 additional per month to see how closer he can reach to his goal. You find that ______. a) surplus of Rs. 2,13,707 b) shortfall of Rs. 1,68,091 c) surplus of Rs. 6,47,691 d) surplus of Rs. 1,47,691




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22. Your client starts investing immediately for 10 years annually Rs. 60,000 in the ratio of 80:20 in equity and debt products. You expect return from equity and debt to be 11.75% p.a. and 8.25% p.a. during this period. To protect the wealth, he rebalances the portfolio in 40:60 ratio of equity and debt after 10 years and invests in the new ratio annually Rs. 60,000 for the next 5 years. The return expected from equity and debt in this period subsides to 9% p.a. and 7% p.a., respectively. What rate of return is expected on his total investments? How would this return fare when seen from average inflation of 6% during the entire period? (a) 6.96% p.a.; real return of 0.91% p.a. (b) 7.57% p.a.; real return of 1.48% p.a. (c) 7.24% p.a.; real return of 1.17% p.a. (d) 9.52% p.a.; real return of 3.32% p.a. 23. Your client Mr A. has his Rs. 50 lakh portfolio in three asset classes as on 1st April 2009 comprised of Equity and Debt each in 35 % allocation with the rest of the portfolio invested in Gold ETF. Over the period up to 1st January 2013, Gold has given a total return of 90 % in the portfolio whereas equity and debt have total return of 11% and 15%, respectively. You rebalance the portfolio today and change its allocation to 60% in equity with the other two classes equally sharing the balance. What should be the transfer of money amongst asset classes. (a) Shift from Equity to Debt Rs. 1,52,962 and shift from Gold ETF to Equity Rs. 6,66,762 (b) Shift from Debt to Equity Rs. 2,10,000 and shift from Debt to Gold ETF Rs. 1,05,000. (c) Shift from Debt to Equity Rs. 6,51,500 and shift from Gold ETF to Equity Rs. 14,89,000 (d) Shift from Debt to Equity Rs. 9,01,176 and shift from Gold ETF to Equity Rs. 15,69,28 24.

Present Age of Daughter 18 Age when Daughter gets married 25 Provision for Daughter's marriage expenses at current costs 2,000,000 Present age of Son 16 Age when Son gets married 26 Provision for Son's marriage expenses at current costs 1,500,000 Cost of escalation of marriage expenses 7.50% Existing funds to be utilized 925,000 Aggressive fund return 11% Risk free return 7%

Goal & Strategy: You suggest Mr. A to achieve the goal for accumulation of funds for marriage expenses by starting a systematic regular monthly investment immediately along with the lump sum of existing funds available in an aggressive fund for 4 years and shift to safe investments 3 years prior to Daughter's




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marriage. What is the approximate monthly investment amount required?

a. 68340 b. 56232 c. 52632

25. In order to meet the goal of higher education of his son after 15 years, a person chooses to invest in two series of Inflation Indexed Bonds, each having a 10-year maturity period. One series is to be invested immediately and the other after 5 years. A sum of Rs. 10 lakhs is invested in the first series, while the invested sum is increased to Rs. 15 lakh in the second series. The real coupon is 1.5% while average inflation over the entire period is estimated to be 5% p.a. The coupons to be received and the maturity proceeds of individual bond series are invested in risk free instruments at 6% p.a. till required for higher education. What would be the extent of accumulation for the higher education goal?

a. 5075987 b. 5347134 c. 5117550

26. ACCUMULATION/SWITCHES-1: The higher education costs per annum are Rs. 3 lakh at present costs. The costs are escalating @9% per annum. Mr. A estimates for his son that such funds would be required for 5 years after 6 years from now. He starts accumulating funds immediately in a systematic manner every month in an equity mutual fund scheme. He would switch equivalent funds required for a particular year to liquid mutual fund scheme one year in advance. The funds would continue to be accumulated for a period up to the last switch to liquid fund. What should be the SIP amount in the equity growth fund? (Take expected return from equity growth funds @12% p.a. and from liquid fund @6% p.a.) a.19850 b. 18764 c. 24950 27. As a tax efficient strategy to meet entire education expenses, a Debt Fund and an Equity Fund is started today with initial investment of Rs. 5,00,000 each. Different SIPs are also started immediately, in Debt Fund for 4 years and in Equity Fund for 10 years. Debt Fund is used to meet entire Basic Education expenses. The Debt Fund is also used to meet the yearly expenses of secondary education and higher education from lump sum amounts switched at certain intervals from the Equity Fund in the following manner: First; at age 8 to meet secondary education expenses from age 11 to 13; Second, at age 11 to meet the secondary education expenses from age 14 to 16; Third, at age 14 to meet the higher education expenses. The expenses due in a year are withdrawn in the beginning. What should be the amounts of monthly SIPs in Debt Fund and Equity Fund today?




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a) 51709 b) 76,947 c)80,908 d) 67890

Basic Education to start at age 5 Years of Basic Education 6 years

Funds required for Basic Education

250,000 Rs. p.a. Secondary Education to start at age 11 Years of Secondary Education 6 years

Funds required for Secondary Education

400,000 Rs. p.a. Higher Education to start at age 17

Lump sum required for Higher Education

3,000,000 Rs. Cost escalation for all education expenses 8% p.a. Returns expected from Debt schemes 7% p.a. Returns expected from Equity schemes 11% p.a.




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Loan Amortization Schedule 28. Vinod has not taken any loan but has recently invested in an upcoming housing project in Aurangabad for a flat worth Rs. 44 lakh of which Rs. 4 lakh down payment has already been made. He has to pay 20% of the remaining amount on 1st October, 2009 and another 20% six months thereafter. The 3rd installment of 30% shall be due on 1st January, 2011 and the final 30% one year thereafter, pursuant to which the possession would be obtained.

Vinod has tied up with a bank for housing loan at fixed rate of interest of 12.5% p.a. The Bank would release loan installments as per the schedule finalized with the Builder. The tenure of loan is 15 years from the date of disbursement of first installment and EMI/revised EMI would be payable a month after the respective release of loan installments. The EMI changes at every stage of the release of installments as if the outstanding loan amount is repayable over the remaining tenure. Vinod wants to know what would be the EMI payable after the full disbursement of loan amount.

a) Rs. 47,812 b) Rs. 50,818 c) Rs. 52,390 d) Rs. 52,537

29. Anita availed of the housing loan at an interest rate of 9% p.a. (on reducing monthly balance basis) on 1st

December, 2003 for a term of 15 years. The first EMI was paid on 1st January, 2004 and thereafter on 1st of every month. Anita wants to know by how much the EMI should be increased from 1st November, 2009 if the entire loan is to be repaid by 1st December, 2012.Principal amount of loan outstanding as on 1st October, 2009 is Rs. 23.47 Lakh. Pursuant to payment of installment, if due (Assume that the housing loan company agrees to such an arrangement without any penalty or charges)

a. Rs. 39,426 b. Rs. 38,223 c. Rs. 39,802

30. Mr. A had taken a loan of Rs. 40 lakh in 1st July 2010 at a floating rate of interest of 10% p.a. for tenure of 20 years from a housing finance company. The company sent a notice raising the interest rate to 10.75% p.a. effective 1st January 2012 thereby increasing EMI. He decides to refinance the loan at 10.25% from a bank which charges a processing fee of 1% of loan sanctioned. What absolute amount he stands to save in the remaining tenure if the outstanding loan amount (pursuant to payment of 1st April 2012 installment) is refinanced so that the new loan terminates as per original tenure? (a) Rs. 3,60,948 (b) Rs. 1,92,266 (c) Rs. 4,90,240 (d) Rs. 2,39,401




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31. An individual has recently purchased a house worth Rs. 40 lakh for self-occupation by availing housing loan of Rs. 28 lakh at 9.25% p.a. rate of interest. The tenure of loan is 18 years. He has Rs. 12 lakh financial assets at present. He is expected to save annually Rs. 2 lakh which he will invest on a quarterly basis beginning a quarter from now in an instrument which is expected to provide return of 9% p.a. What would be his net worth five years from now? The value of the house which is for consumption purposes is not considered in the net worth so arrived. (a) Rs. 2.83 lakh (b) Rs. 18.82 lakh (c) Rs. 6.68 lakh (d) Rs. 7.36 lakh 32. Mr. A purchased a flat worth Rs. 50 lakh in January 2007 by availing a housing loan of Rs. 35 lakh for tenure 15 years at the rate of 9% p.a. The value of his flat as in January 2013 has appreciated to Rs. 90 lakh. What approximate value of home equity can he consider in his flat towards his unencumbered interest after also setting aside 15% of the appreciation value towards taxes and other costs to be discharged on selling the unit? (a) Rs. 49 lakh (b) Rs. 74.56 lakh (c) Rs. 57.79 lakh (d) Rs. 63.79 lakh 33. Mr. A purchased a flat worth Rs. 50 lakhs in 1st January 2007 by availing a housing loan of Rs. 40 lakhs for tenure 15 years at the rate of 8.25% p.a. The value of his flat as on 2nd-April-2018 has appreciated to Rs. 1.25 crore. What approximate value can be considered by a finance company towards "Loan against Property" if the norm is to consider 60% of the value of home less any encumbrances? (a) Rs. 59.74 lakh (b)Rs. 60 lakhs (c)Rs. 63.56 lakh (d)Rs. 66.15 lakh




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Risk Assessment & Insurance Planning Insurance contract Contract of Insurance being a contract has to satisfy the pre-requisites of the contract under the Indian Contract Act, 1872. The conditions necessary for a contract as per the act are: Consideration: A contract is not valid unless there is consideration given by one party to the other

party. In case of insurance contract, the insured pays premium to the insurer in return for an insurance cover.

Common and Free Consent: Both the contracting parties should understand the contract and should

consent to the same contract. Also, the consent such made should be by a free mind without any influence by any party.

Competent to contract: The party to the contract should be competent to contract. Minors and

persons of unsound mind are not competent to contract. Legal: The objective of the contract must be legal and should not prohibit by any law.

Distinct legal characteristics of an insurance contract In addition to the basic requirements of the contract, Insurance contracts are subject to certain special principles Utmost good faith

Insurable Interest

Indemnity

Subrogation

Co-insurance & Reinsurance –Co-insurance refers to the sharing of insurance by two or more insurers in an agreed proportion. This can be done by the insurer himself. Co-insurance is different from reinsurance the fact that different risks or a proportion of amount is shared between the insurers to diversify the risk or in case of very high value of assets a single company cannot afford to insure the risk alone. In case of claims, the losses are shared in the ratio of liability assumed




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Condition of average The Financial Planner must help to decide the sum assured. This is because most policies have a “Coinsurance Clause”, which provides that if the sum insured is less than 85% of the value of the property, then this is case of under insurance & insured will have to bear a proportion of the loss. For example: If the property value is 10,00,000 and the sum assured is 7,00,000, on a loss of 4,00,000 on the property only, 7,00,000/10,00,000*4,00,000 = 2,80,000 will be borne by the insurance company. Common types of deductibles •Deductibles are amounts specified at the time of contracting to be deducted at the time of making the claim. The common types of deductibles are: • Excess: Excess is the amount compulsorily deductible from the amount of the claim. This ensures that the insured is not compensated 100% by the insurer which entails certain amount of risk to be borne by the insured himself. Excess can also be voluntary to reduce the amount of premium. The main advantages of Excess are that certain minimum risk shared by the insured to act prudently & to avoid processing of smaller amounts of claim •Franchise: In case of an excess if the amount of claim exceeds the excess the amount of excess is deducted and balance amount is paid. However, in case of franchise, if the claim exceeds the franchise the whole claim is paid and if the claim is less than franchise then nothing is paid. Explanation of Difference between Excess and Franchise

Type of Deductible Amount Deductible

Amount of claim Amount payable

Excess 300 500 200 Excess 300 200 0 Franchise 300 500 500 Franchise 300 200 0

Household Insurance: Householders’ Insurance (HHI) policy is designed to cover various risks and contingencies faced by householders under a single policy. It provides protection. For property and interests of the insured and his family members who permanently reside with the insured. Replacement or Reinstatement value: Reinstatement cost is the cost which would incur on reconstructing the damaged property. As per standard regulations, reinstatement cost includes value of foundation and it doesn’t include land cost. This policy entitles the insured person to a property of the same construction as




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the property which has been destroyed. But it must ensure that the property has been adequately insured. Replacement value is the amount necessary to replace or rebuild your home or repair damages with materials of similar kind and quality without deducting for depreciation. Indemnity value: This is the value of the item at the time of the loss. Payment of the indemnity value is designed to put you in the same financial position you were in immediately before the loss occurred. If a 4-year-old car is destroyed completely, the insurance company will compensate for what the car was worth at the time of its loss. If it paid the full value of a new car, this would create a moral hazard by motivating some drivers to intentionally destroy the car in an attempt to profit from insurance. For the same reason, the insured cannot collect from multiple insurance policies, even from different companies, for the same loss. Indemnity value is also referred to as Market Value. What is the procedure for assessing the value of my home structure and its contents? The structure of your home is insured as per the re-instatement value and the contents are insured as per the market value. The value of your home structure is assessed as per the area of your home multiplied by the rate of construction per. sq. feet, as on the date of taking the policy. For example, if your home is 1000 sq. feet and the construction rate per sq. feet is Rs. 800/-, then the sum insured for your home’s building structure is Rs. 8,00,000. On the other hand, the contents are assessed on the market value of the items. This means that if there were a loss, the claim would be paid on the value of purchasing a similar new item, less depreciation for the usage. Liability Insurance Liability insurance is a policy that offers protection to businesses and individuals from risk that they may be held legally or sued for negligence, malpractice or injury. This insurance policy protects the insured from legal payouts and costs for which the policyholder is deemed to be responsible. There are a number of liabilities insurance policy available. These include third party liability, public liability, product liability, employer liability, professional liabilities, industrial risks and so on. Professional Indemnity Policy: This policy is meant for professionals to cover liability falling on them as a result of errors and omissions committed by them whilst rendering professional service. The policy offers a benefit of Retroactive period on continuous renewal of policy whereby claims reported in subsequent renewal but pertaining to earlier period after first inception of the policy, also become payable. Scope: The policy covers all sums which the insured professional becomes legally liable to pay as damages to third party in respect of any error and/or omission on his/her part committed whilst rendering professional




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service. Legal cost and expenses incurred in defense of the case, with the prior consent of the insurance company, are also payable, subject to the overall limit of indemnity selected. Only civil liability claims are covered. Any liability arising out of any criminal act or act committed in violation of any law or ordinance is not covered. The policy is meant for professionals. 1. Doctors and medical practitioners 2. Engineers, architects and interior decorators. 3. Lawyers, advocates, solicitors and counsels. 4. Chartered accountants, financial accountants, management consultants. Critical illness insurance This insurance policy provides cover on the insured suffering from several dreaded diseases. The policyholder gets the entire sum assured amount and he does not have to submit and proof of the expenditure done or to be incurred. Also, some policies come with a premium waiver benefit where after diagnosis of critical illness the future premium payables are waived. Disability Insurance It is very common for people to take insurance for their valued assets including cars, homes and health. But not everyone insures something that is very essential for survival - the ability to earn an income by working. Apart from normal health insurance policies, a disability insurance plan is a very critical type of insurance scheme that individuals must consider having. A long - term disability can wreak havoc on your personal finances and savings if you are not wholly prepared. Permanent & Total Disablement Insurance

This Insurance policy provides you cover against Permanent Total Disablement (PTD) on account of an accident. The definition of total disability usually refers to “the inability to perform every and any duty of own occupation” or “the inability to carry out the substantial and material duties of occupation”. Some disabilities automatically classify the insured as totally disabled. Such disabilities are also referred to as presumptive disabilities and include loss of hearing and speech, permanent blindness, total blindness, loss of two limbs etc. When the insured becomes disabled, he has to wait for a defined period of time before receiving benefits from disability insurance policy. This period influences the premium amount for disability insurance, if you choose a shorter waiting period, the premium might be higher.




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Temporary Disability Insurance Policy This policy provides for protection against the risk of loss of income earned during the period of disability, hospitalization or due to inability of attending work due to gradual healing (through rest) after sickness or injury commonly known as convalescence. Some personal accident policies provide a limited benefit of protecting the income during the time of start of disability; approximately equal to 1% of the capital sum insured per week of such disablement till a certain limit of period generally 2 years. Health Insurance Health insurance is a type of insurance where, the insurer pays the medical cost of the insured if the insured becomes sick due to covered causes, or due to accidents. Due to increasing cost of healthcare and risk of diseases, accidents and disability Health Insurance are becoming popular. Medical expenses cannot be estimated and have a tendency for sudden impact on the finances of the Individual. Portability of Health Insurance

When you change your health insurance policy from one insurance company to another, you don’t have to lose the benefits you have accumulated. In the past in health insurance policies, such a move resulted in your losing benefits like the waiting period for covering "Pre-existing Diseases". Now IRDA protects you by giving you the right to port your policy to any other insurer of your choice. It has laid down that your new insurer “shall allow for credit gained by the insured for pre-existing condition(s) in terms of waiting period”. This applies not only when you move from one insurer to another but also from one plan to another with the same insurer.

Rights

You can port your policy from and to any general insurance company or specialized health insurance company

You can port any individual/ family policies Your new insurer has to give you the credit relating to waiting period for pre-existing conditions that

you have gained with the old insurer Your new insurer has to insure you at least up to the sum insured under the old policy The two insurers should complete the porting as per the timelines prescribed in the IRDA

(Protection of Policyholders’ Interests) Regulations and guidelines




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Conditions

• You can port the policy only at the juncture of renewal. That is, the new insurance period will be with the new insurance company

• Apart from the waiting period credit, all other terms of the new policy including the premium are at the discretion of the new insurance company

• At least 45 days before your renewal is due you have to o Write to your old insurance company requesting a shift o Specify company to which you want to shift the policy o Renew your policy without a break (there is a 30 day grace period if porting is under process)

IRDA Facilitation

IRDA has created a web-based facility to get and maintain data about all health insurance policies issued by insurance companies to individuals so that it can be accessed by the new company to which a policyholder wishes to port his policy. This enables the new insurer to obtain data on history of health insurance of the policyholder wishing to port his policy.

Guidelines for Portability of Health Insurance Policies as per IRDA Regulations 2016 1. A policyholder desirous of porting his/her policy to another insurance company shall apply to such insurance company to port the entire policy along with all the members of the family, if any, at least 45 days before, but not earlier than 60 days from the premium renewal date of his/her existing policy. 2. On receipt of intimation referred under Clause (1) above, the insurance company shall furnish the applicant, the Portability Form as set out in Annexure-I to these guidelines together with a proposal form and relevant product literature on various health insurance products which could be offered. 3. The policyholder shall fill in the portability form along with proposal form and submit the same to the insurance company. 4. On receipt of the Portability Form, the insurance company shall seek the necessary details of medical history and claim history of the concerned policyholder from the existing insurance company. This shall be done through the web portal of the IRDAI. 5. The existing insurer, on receiving such a request on portability shall furnish the requisite data for porting insurance policies in the prescribed format in the web portal of IRDAI within 7 working days of the receipt of the request.




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6. On receipt of the data from the existing insurance company, the new insurance company may underwrite the proposal and convey its decision to the policyholder in accordance with the Regulation 4 (6) of the IRDA (Protection of Policyholders’ interest) Regulations, 2002. 7. If, on receipt of data within the above time frame, the insurance company does not communicate its decision to the requesting policyholder within 15 days in accordance with its underwriting policy as filed by the company with the Authority, the insurance company shall not have any right to reject such proposal and shall accept the proposal. 8. In order to accept a policy which is being ported in, the insurer shall not levy any additional loading or charges exclusively for the purpose of porting. 9. No commission shall be payable to any intermediary on the acceptance of a ported policy. 10. Portability shall be allowed in the following: a. All individual health insurance policies issued by General Insurers and Health Insurers including family floater policies. b. Individual members, including the family members covered under any group health insurance policy of a General Insurer or Health Insurer shall have the right to migrate from such a group policy to an individual health insurance policy or a family floater policy with the same insurer. Thereafter, he/she shall be accorded the right mentioned in 1 above.




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Bonus applicable in Traditional Life Insurance Policies In the most common understanding of the word, bonus is a reward or any extra amount that one may receive over and above the base amount. A similar concept is also applicable to your life insurance policy. In this context, a bonus is an additional sum which gets accrued to the policy on a yearly basis. This amount is paid out by the insurance company to the policyholders upon maturity of the plan, or in case of unfortunate death.

What bonus

Premiums paid by policyholders are pooled within the insurance company’s life fund. The company uses

these pooled assets to pay out claims. A large part of the life fund is invested in government-secured debt

instruments, with a small portion invested in equity to achieve a desired return. Based upon the earnings

from the investments made by the company and its claims experience, the company aims to distribute a part

of its surplus to the with-profits policyholders in the form of bonus.

The bonus rate is decided after considering a variety of factors such as the return on the underlying assets,

the level of bonuses declared in previous years and other actuarial assumptions.

Bonus is offered on traditional plans which are built in to the plan structure. To avail of the bonus, it is

important that the type of plan you have purchased is a with-profits one, often known as a participating

policy as well. These types of policies participate in the surplus which gets shared in the form of a bonus to

the policyholders.

Types of bonuses

Simple Reversionary bonus (SRB) This type of bonus is calculated on the sum assured only. This bonus is

declared annually and is accrued to be paid out at the time of a claim or maturity.

Compound Reversionary bonus (CRB) CRB is calculated as a percentage of the sum assured and all previously

accrued bonuses. The bonus of each year is added to the sum assured and the next years bonus is calculated

on the enhanced amount.

Let’s take an example to understand which type of bonus is beneficial for you

Rahul Khanna has two participating policies of Rs 5,00,000 each. Let’s assume that on the first policy he gets

a bonus using the simple revisionary method and on the second policy he gets a bonus using the compound

revisionary method.




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The SRB declared on the policy is Rs 25 per 1,000 of sum assured, while CRB declared is 3 per cent throughout

the policy term. As seen from the table above, the CRB to be accrued at the end of the 10th year is much

higher, as compared to the SRB of the same year.

Terminal Bonus: The terminal bonus, also known as a persistency bonus, is a bonus paid to indicate an overall

performance of a participating policy. The terminal bonus is paid at the time of maturity or death of the life

assured. This form of bonus may be given after staying in the policy for a pre-determined time period and is

offered at the discretion of the insurer.

Interim Bonus: Interim bonus is payable for those policies that mature or result in a death claim in between

two bonus declaration dates. While the policy has already accrued the bonus declared at the end of the last

financial year, there may be a short period in between the bonus declaration date and the maturity/claim

date for which the policy has not received bonus. In such instances, bonus is added on a pro-rata basis using

the interim bonus rates declared by the company. An interim bonus ensures that policyholders who claim

benefits in midst of a year will receive credit for keeping the policy in force for that part of the year.

Cash Bonus The insurance company may decide to give the bonus in cash, i.e. bonus accruing in a year will

be paid to the policyholder at the end of the year. This gives the policyholder an opportunity to receive the

bonus year on year rather than the usual way of accruing till bonus maturity.

Things to consider

Bonus offered While evaluating a traditional policy, it is a good idea to consider beforehand the type of bonus

that your plan offers. This would be mentioned in the brochure of the plan, or you could also check with your

agent/intermediary.

Check bonus rates While choosing your traditional plan, make sure to check the bonus rates offered by them

over the years. These rates are usually published on the insurers website and will give you an idea of the kind

of benefits you stand to gain from the particular policy.




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Paid UP Policy Paid-up policy falls into the category of traditional insurance plans. . If an individual stop paying the premiums, but does not withdraw the money from his/her policy, the policy is referred to as paid up. The sum assured is reduced proportionately, depending on when he/she has stopped paying the premiums. The concerned policyholder can then receive the amount (Paid up value plus accumulated bonus till paid up date) at the end of the term. The sum assured is limited to the paid-up value. It is calculated as the ratio of number of premiums paid to the total number of premiums that were supposed to be paid according to the policy multiplied by the sum assured at maturity. In case of Paid up, Policyholder will not be entitled for any Terminal Bonus at the time of maturity of policy. So, when you make a policy paid-up, it still is in force with a reduced sum assured and does not discontinue. The reduced sum assured is called the paid-up value of the policy. After date of Paid up no fresh bonus will accumulate in the policy till maturity.

Here is the formula for Paid-up:

Paid-Up Value = (Number of premiums paid / Total number of premiums payable) * Original sum assured Surrender of Life Insurance Policy

Life insurance is a long-term financial product. Though you may buy any LIC insurance or investment policy

with a specific purpose to meet a long-term need, your investment perspective can change over the years

of time. Sometimes you may have to exit from your long-term LIC investment for various reasons such as a

change in your requirement, sudden personal economic hardship or the product is a misfit for your current

investment portfolio. Whatever may be the reason, as per IRDA guidelines, Life Insurance companies allows

you to surrender your policy mid-way with certain conditions attached to it in specific to each policy.

What is the surrender value?

Surrendering the LIC policy means terminating the policy before the date of maturity. As the name implies,

surrender value is the amount that is paid by the insurance company on terminating or surrendering the

policy.

‘Surrender value’ exists for only those Life Insurance policies that have savings component attached to it.

For such savings plus insurance plans, the surrender value will be paid on terminating the policy in return of

all the premiums paid by you till the date of surrender. In many cases, depending on the terms and




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conditions of the policy surrender charges will be levied. The final surrender value payable is determined

after deduction of charges if any.

Usually, in most of the traditional investment policies, policy acquires the surrender value after the

payment of premium for at least two to three policy years.

What is guaranteed surrender value?

Guaranteed surrender value is the amount that is guaranteed to be paid by the insurance company in case

of surrendering the policy during the policy term after the policy acquires a surrender value. Guaranteed

surrender value is generally a certain percentage of total premiums paid excluding the additional premiums

paid for riders if any. Percentage may vary depending on the policy term and the policy year at which you

are surrendering the policy. Percentage or the surrender value factor increases with policy terms. That

means percentage applicable will be more as the policy nears maturity.

In most of the policies, along with guaranteed surrender value, the surrender value of vested bonuses will

also be paid (if applicable). Based on the policy year of surrender, percentage of vested bonus payable

varies.

For example, let’s say you have invested in LIC’s New Jeevan Anand plan for 15 years. Let’s say you are

paying a yearly premium of INR 40,000 (net of tax). In case, after the third policy year you wish to

surrender, your policy’s guaranteed surrender value will be 30 % (surrender value factor applicable) of total

premiums paid. Following will be the guaranteed surrender value:

Guaranteed surrender value = Surrender value factor X Total premiums paid

= 30% X (40,000 X 3) = INR 36,000

Let’s say, vested bonus for your policy at the time of surrender is INR 61,500. Surrender factor applicable

for accrued bonuses is 17.66%, then surrender value of vested bonuses will be:

The surrender value of vested bonuses = Applicable surrender factor X Accrued bonuses

= 17.66% X 61,500 = INR 10,861




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The Insurance Regulatory and Development Authority of India, (IRDAI), has issued new guidelines for unit-linked insurance plans (ULIP) and traditional life insurance policies which will come into effect from February 1, 2020. 1. Increase in time period allowed for policy revival According to the new guidelines, IRDAI has asked insurers to increase the time period allowed for the revival of life insurance policies. To comply with the 'revival of policy' provision, insurers have to increase the time period allowed for the revival of ULIPs to three years from the date of the first unpaid premium. For non-linked (Traditional insurance) products, the time period allowed for the revival of policy will be five years. 2. The minimum sum assured for buying ULIP & Traditional policies reduced from 10 times to 7 times the premiums paid The minimum Sum Assured on the death during the entire term of the policy shall not be less than

7 times the annualized premium, for limited or regular premium products. 1.25 times the single premium for single premium products. 105% of the total premiums received up to the date of death.

For policies issued on minor’s life, the date of commencement of risk may start anytime on or up to two years from the date of commencement of the policy or on the policy anniversary after attainment of majority, whichever is earlier.

How it will impact you: A lower sum assured could result in better returns as lesser amount of mortality charges will get deducted. However, going for a lower sum assured, that is, less than 10 times of the annual premium paid will not help you avail tax benefits. Currently, you can avail tax benefit on policies which have a sum assured of 10 times the annual premium or more. 3. Withdrawal limit from pension plans increased to 60 percent To improve flexibility and liquidity for policyholders, insurers are now mandated to allow beneficiaries to withdraw a larger lump sum of 60 percent at vesting, surrender or death, as opposed to the current 33 percent. However, when you withdraw a lump sum from pension plans, only one-third of the corpus will remain tax-free (as is the case now), not the entire 60 percent. Around 25 per cent of the insured value can also be withdrawn by the policyholders in Pension plan during an emergency situation that includes a serious illness, marriage and the education of their children. Also, in pension plans the compulsion to give guaranteed return is also now removed.




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What are the new ULIP GUIDELINES?

• Lock in for Five Years and Premium Payment Term: Minimum lock-in period is 5 years and barring single premium policies, the minimum payment term has also been raised to 5 pay. In case of Top up premium lock in premium is same 5 year. It means you cannot top up in last 5 years of the policy.

• Net Reduction in Yield for Every Year: This guideline stipulates the maximum net reduction in yield (due to charges) is 3% for policy term up to 10 years and 2.25% for policy term above 10 years.

• Cap on Discontinuance Charge: IRDA has introduced a cap on surrender charge, now termed as policy discontinuance charge, basis the year of discontinuance and annual premium. This allows life insurers to charge only a small penalty on early surrender of policy.

Taxation of pension plans issued by life insurance companies: In a typical pension plan, you invest at regular interval in your working life and out of that amount there will be a corpus that will be accumulated on retirement and from that corpus a regular stream of cashflow (pension) is given in your post retirement period. Now we will look at taxation of each of these components: • Taxation of investment made in pension plan:

The investment that you make in your pension plan are eligible for tax deduction under Sec 80CCC. These provisions are similar to provisions we saw for deduction under 80C for life insurance premiums paid i.e. for example if the policy is issued after 1st April 2012, then deduction under 80CCC will be restricted to 10% of premiums invested in pension plan & so on. Also, maximum deduction u/s 80C, 80CCC & 80CCD (1) combined is Rs 150000. • Taxation of corpus accumulated on retirement:

Total 60% of accumulated balance, Policyholder can withdraw at vesting age. However, 1/3rd of accumulated corpus can be received as tax free. Pension received from pension plans is added to your income and taxed as per slab. If Death happens within policy term most pension plans from insurance company give death benefit – this will be tax free in hands of family member.

Taxation of surrender value if you surrender your pension plan mid – way.

If you surrender policy mid – way, surrender value received will be added to your income and you will have to pay tax on it according to your tax slab.




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Human Life Valuation Assigning a value to the Human Life is next to impossible job as each individual can be valued differently, each individual is at different stage of his life and each individual aspires to reach a particular goal in life. Though human life cannot be given a monetary value however his income earned per annum can be capitalized and discounted at present value to arrive at a fair estimate of the earning capacity of the individual

Computation of Human Life value requires a detailed analysis of many factors. Some of them are –

1. Annual Income of the life 2. Balance of active earning period till retirement 3. Personal Expenses 4. Inflation 5. Future increase in salary, etc.

Capitalization of Income method:

The first step towards computation of Human life value would be to determine the net annual income of the person after deducting the amount spent by him for his personal use like premium for insurance policies, maintenance expense, income tax, etc. This amount will be the amount that he affords to his family annually. The economic value of this life again depends on the length of his active earning period.

Let us assume that the person is 25 years of age and his annual income after deducting all his personal and other expenses sums up to Rs.2,00,000. Assuming that he would continue with the existing job till his retirement up to an age of 55 years, then his income to his family will continue for 30 years, provided he survives till retirement. So, if he survives to his retirement, then the family would get Rs.200,000 for 30 years, i.e. 200,000 * 30 = 6,000,000 ( discounted by time value of money). This will be the amount that the family will lose on his premature death.

Capitalization of expenses method:

Dependents needs: In the event of death of the earning individual the dependents require a regular stream of expenses for the essential basic needs of the survival of the family. Also, certain amount of regular income will be required to continue with the lifestyle and the standard of living which was maintained before the death of the earning member. Educational needs & other Goals: Parents may have aspiration for higher education for their children. With the rising cost of education, it becomes important to start saving from as early as possible Funds to pay back loans: The individual must have exposed to a home loan mortgage where he will require funds to pay back the loan.




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Married Women's Property Act

The Married Women's Property (MWP) Act was enacted with a view to protect the properties of women against the creditors. Under MWP Act all the properties that belong to the women gets insulated and protected from all the other court attachments or any income tax department attachments that the husband has run up. Let's take an example a business family; the family could be a trader or a manufacturer or any other business. In due course of business there are some credit limits or there are bank loans, which have been taken by the business. The bank secures these credit limits against the assets of the business and also takes a personal guarantee of the owner of the business which could be the husband or the family.

In case of the untimely death of the husband the bank starts recovering their loans and, in the process, they liquidate the assets of the business and also, they attach the properties that belong to the guarantor, which in this case is the husband.

In order to protect the family; the wife and the children, the life insurance policies that the husband takes; he should make sure that these policies at the time of taking the policies should be taken under the MWP Act because life insurance policies are also entitled to be attached, which means that the claims that paid out on the death of the husband, goes to the bank and not to the surviving members.

The process of taking the policy under MWP is very simple. At the time of making an application one has to fill in MWP addendum. This form is also provided by life insurance companies. In the form one has to fill in the details of his wife and children, whoever he wishes to make beneficiaries in the policy. In case of death, the policy proceeds do not go to anybody else other than the beneficiary as named by you in the policy. There is no attachment because the policy does not belong to the husband.

We talk about life insurance as means of financial protection. What is the sense if the money does not go to the family and gets attached for some other reasons? Let me make a point here, all kind of life insurance policies whether online term policies or any other form of life insurance policies are entitled to be issued under MWP Act and one should definitely make a point that he issues a policy under MWP Act to protect his family.

Q: Can I get an addendum to an existing life insurance policy?

A: No. The MWP addendum can be attached only at the time of taking the policy. However, to answer the question, if one still wants to protect his family against this then he can do an absolute assignment of the policy even today; after taking the policy even if he is five-ten years down the policy, he can make an absolute assignment of the policy in favor of his wife. So, it does not anymore belong to him, it is not his property so it cannot be attached.




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Key man Insurance Keyman insurance can be defined as an insurance policy where the proposer as well as the premium payer is the employer, the life to be insured is that of the same employer's key employee (Keyman) and the benefit, in case of a claim, goes to the employer. The `Keyman' here can be any employee, having a special skill set or substantial responsibilities, who contributes significantly to the profits of that organization. It is not a special plan of insurance but just application of life insurance to fulfill a special need. Only term insurance is allowed to be bought as Keyman insurance. The term of the policy usually coincides with the retirement age or the contract period of the key employee. Loan against policy and riders are not permitted. In this policy, nomination can be done only in favor of the company. Basic conditions required to be fulfilled in order to buy a Keyman policy 1. The 'key-man' should hold less than 51% of the company's shares. 2. The total number of shares of the company held by the Keyman and his family together should be less than 70% of the company's shares. 3. Some proof of the critical role that the proposed life (the Keyman) plays in the business of the company, is required. The maximum sum assured for Keyman insurance is lower of: 1. Ten times the keyman's annual compensation package. 2. Three times the average gross profit of the company for the past three years. 3. Five times the average net profit for the past 3 years. Keyman insurance is normally not issued if a company's profit or turnover is declining unless there are very special circumstances. Factors like age limit and coverage term varies from one insurance company to another. Loss making companies cannot buy Keyman insurance. Taxation aspects of Keyman insurance:

a) The premium paid by the company buying the Keyman insurance policy is an allowable business expenditure for the company under section 37(1) of the Income-Tax Act.

b) Premiums paid by the company on the life of a keyman would not be treated as perquisites in the hands of such a keyman.

c) Death benefit received by the company are taxable. In case there is a claim (on death of the insured), the claim proceeds are taxable as business income in the hands of the company.

d) On death of Keyman, Company can pay Ex-gratia payment to dependents of that key man without any limit. This Ex – Gratia payment is allowed as expenses as per Income tax and on the other side Ex – gratia payment received in lump sum from employer is tax free in the hands of dependents of Key man.




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Employer – Employee Insurance Scheme

Employer-Employee Insurance Scheme is an insurance arrangement between the two, where, the employer purchases an insurance policy for the employee. This arrangement is based on the principle that the employer has an insurable interest in his/her employees. The interesting fact is that both the employee and the employer is benefited through this arrangement.

Eligibility :

Combined shareholding of the employee and his or her relatives such as a spouse, children, in-laws, parents, siblings, etc. in the employer company should not exceed 51 %.

There should be a relationship between employer and employee as the employee earns a salary for his services provided to the employer.

Any company, Partnership firm, or even proprietary concern shall be eligible for taking insurance for their employees under this scheme.

Even a loss-making company can get the benefit of this scheme. All plans and all modes are allowed for this scheme.

Benefits to the Employer

The employee will feel to be more secured and honored and naturally, the loyalty to the employer is

enhanced & It helps to minimize employee attrition rate. The employer is entitled to get exemptions for the premium amount (whether it is under single or

non-single mode) u/s 37(1) of Income Tax act as business expenses of the firm.

Benefits to the Employees

This scheme works as a reward program for employees and helps in raising their morale.

At the time of assignment, surrender value is taxable in the hands of employee as perquisite as per section 17(2) (V) of the IT Act

Premium paid by the employer (after assignment) is treated as perquisite in that financial year and will be added in income accordingly.

Post assignment, even though the premium amount is paid by his employer, the employee can claim income tax exemption u/s 80C.

Post Assignment, Maturity proceeds will be available to the employee only. Death claim, if any, shall be paid to the nominee, nominated by the employee




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Tax deferment - strategy for profit making companies Company takes a policy for its director(s) under employer- employee. Premium paid is treated as business expenses of the company u/s 37(1) of Income Tax Act and the

company need not pay tax on it. No Assignment – As long as the policy is not assigned, no perquisite for the life assured and the

director/employee is not taxed for perquisites. As assignment is not done, maturity amount goes to the company. The maturity amount will be

considered as business income and the company will have to pay tax on the maturity amount. In order to defer the tax liability, company can take a new insurance policy in the name of the

director itself in single premium mode, using the maturity amount. As new premium paid is considered as the business expense of the company, no tax liability will be there.

Tax deferment - Future of the company – possibilities Possibility 1 - Company continues to make profit.

a) Tax liability is postponed till maturity. b) Tax liability can be postponed again by purchasing a new policy.

Possibility 2 - Company makes losses

a) Maturity can be used to set off losses. b) Get surrender value if situation is worse. c) Make the policy paid up and get paid up value at maturity and set off losses.

Possibility 3 - Director of the company dies

a) Company gets the death benefit. b) Death benefit will be considerably higher than the total premium paid. c) Tax liability can be borne by the company from the maturity amount.




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Employer-Employee Insurance - Assignment

Employee quits the job: Employer can either surrender the policy and get the surrender value or

absolutely assign the policy to the employee as a part of his terminal benefits.

Death of the Employee: The death benefit has to be passed to the nominee of the employee unless it is specifically mentioned in the agreement.

Policy matures without being assigned to employee: Maturity proceedings shall be received by the company but will be treated as the income of the company and will be taxed and TDS will be applicable.

At the time of assignment surrender value of policy is taxable in the hands of employee as profit in lieu of Salary.




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Risk Analysis and Insurance Planning – Question for Practice

1) Surinder wants to know the logic behind calculation of risk premium for Life Insurance of a person his age, given that in a population of 1,000 persons aged 46 years and are healthy. It is expected 6 persons die during the year. If the economic value of the loss suffered by each family of the dying person is Rs. 5,00,000, calculate the pure risk premium for each person per thousand sum assured.

a) Rs. 60 b) Rs. 300 c) Rs. 30 d) Rs. 6

2) Ravi has a Motor Insurance policy for his with an excess clause of Rs. 5000/- on damage by accident. This year he was involved in a car accident. The damage to Ravi’s car was worth Rs 16000/- and the damage to the other car was Rs 9500/-. Ravi’s insurance company admitted the liability. Ravi wants to know how much amount would be payable under this policy by the insurance company in this case?

a) 11000 b) 25500 c) 16000 d) 20500

3) You have advised Veeru to purchase a Rs. 50 lakh Life insurance Term Plan. He wants to know whether

it is necessary to mention the details of his other Life Insurance policy purchased from different insurance companies. In case he fails to mention the same in the proposal form and subsequently dies due to an accident, under which principle his claim could be questioned by the Insurer, if facts of the other existing insurance policy become known to the insurance company at the time of claim settlement.

A) Principle of Insurable Interest B) Principle of Utmost Good Faith C) Principle of Waiver and Estoppel D) Principle of Indemnity

4) Shahrukh wants to purchase a Child Plan from a Life Insurance company to meet Himanshu’s educational needs. He wants to know, if he gets permanent physical disabled due to accident which would hamper his income pursuits, by what means can the policy be kept in force without payment of further premium but retaining intended benefits. You advise.

A) Payor Rider B) Dreaded Disease Rider C) Living Benefit Rider D) Survivor Purchase Option Rider




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5. Priyanka has told you that before divorce Amit had bought a single premium life insurance policy on his own life and expressed on the face of it to be for the benefit of his wife and children as per Section 6 of Married Women's Property Act, 1874. Now, Amit wants to change the beneficiary of the said policy. Priyanka asks you whether it is possible.

A) Yes, by making an amendment in the trust deed. B) No, alteration is not permitted. C) Yes, but with written consent of Anamika only. D) Yes, but only by writing a registered Will.

6. Veeru incurred Rs. 10 Lakh on the construction of his house five years ago which has depreciated today to Rs. 7 Lakh. The cost of construction over the period has gone up by 70%. The depreciated value of household items is Rs. 2.5 Lakh and their present cost of replacement is Rs. 4 Lakh. He wants to buy a Householders’ insurance policy in such a way that the house is insured on reinstatement basis and household goods on the basis of written down value. What is the total amount of sum insured should he take from insurance company?

a) Rs. 9.50 lakh b) Rs. 19.50 lakh c) Rs. 11.00 lakh d) Rs. 12.50 lakh

7. The market value of Salman’s residential property is assessed at Rs. 75 Lakh. He purchased the plot 10 years ago for Rs. 15 Lakh. He incurred 20 Lakh on construction five years ago. The land prices in that area have appreciated by 12% p.a. over the ten-year period and the cost of construction over the last 5 years has gone up by 10% year on year. The rate of deprecation on building is 5 % p.a. You have advised him to insure his house property. He wants to know for what approximate amount he should insure his house property on reinstatement value basis.

a) Rs. 20 Lakh b) Rs. 32 Lakh c) Rs. 25 Lakh d) Rs. 28 Lakh

8. Akshay has an accident insurance policy which pays Temporary Partial Disability (TPD) benefit of Rs.

5,000 per week, for up to 104 weeks. He meets with an accident and is disabled and bedridden for 6 months. He has available leave of 4 weeks, after which he is on loss of pay. What benefit amount will he get from the insurance company?

a) Rs. 1,00,000 b) Rs. 1,10,000 c) Rs. 2,20,000 d) Rs. 1,30,000




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9. Akshay bought a 15-year endowment life insurance policy for Rs. 20 lakh Sum Assured five years ago, the premium being Rs. 85,750, paid annually. The endowment life insurance policy has accumulated simple reversionary bonus of Rs.60 per thousand sum assured p.a. in the last five years and the Insurance Company is expected to declare simple reversionary bonus of Rs. 55 per thousand during the remaining term of the policy. As per terms of the policy company is expected to give final terminal bonus of Rs. 325 per thousand. Avinash wants to know the expected maturity amount from this policy?

a) Rs. 43.50 lakh b) Rs. 37.00 lakh c) Rs. 43.00 lakh

10) Sanjay has also taken money back insurance plan of 20-year term with sum assured of Rs. 5 Lakh for

annual premium of Rs. 23,750. He has paid 16 annual premiums till date before due date. The policy provides 25% of basic sum assured to insured as survival benefit after 5th, 10th, 15th years from the start of the policy.

Sanjay gives you information that Insurance Company has declared reversionary Bonus of Rs. 60 per thousand sum assured for first ten years and Rs. 50 per thousand sum assured for next six years. According to you, in Sanjay‘s Money back Insurance plan, what amount of death claim would be received by the nominee in case of any eventuality with Sanjay’s life today?

a) Rs. 5.0 Lakh b) Rs. 9.5 Lakh c) Rs. 7.8 Lakh

11) A Life Insurance Agent has approached Sanjay with two types of Term Insurance Plans:

(ii) Plan I, without return of premium, term 25 years, Sum Assured of Rs. 25 lakh, yearly premium payable Rs. 1.94 per thousand of SA

(iii) Plan II, with return of total premiums paid, on maturity, term 25 years, Sum Assured of Rs. 25 lakh, yearly premium payable Rs. 2.95 per thousand of SA.

Sanjay is not clear which plan to opt for and she seeks your advice on which policy is beneficial for her, if discounted by the risk-free rate of 7.5% p.a. (Assuming Sanjay lives till maturity of the Insurance Policy)

a) Plan I is better as the net present value is higher b) Plan I is better as the net present value is lower c) Plan II is better as the net present value is higher d) Plan II is better as the net present value is lower




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12) Rajnikant has got a proposal for a ULIP plan from his friend, who is an insurance advisor. This plan has

the following premium allocation charges:

Year 1 Year 2 & 3 Year 4 & 5 Year 6

onwards Premium Allocation Charge 12% 5% 3% 1%

In addition, the following charges shall also be levied; 1) Mortality Charge (charged at the beginning of the year) - Rs.1.51 per thousand sum assured,

increasing 5% year on year

2) Policy Admin Charge (charged at the yearend) - Rs. 720 p.a. , throughout term 3) Fund Management Charge (charged at the yearend) - 1.75% pea, throughout term The proposal envisages that Rajnikant invests Rs. 35,000 p.a. for 10 years. Premium, less charges, is allocated to the fund. The fund grows @10% annually. Proposed Sum Assured in this ULIP plan is Rs.5 Lakh which remains the same throughout the term. Under the policy terms, Sum Assured and the value of units, both are paid on death. Rajnikant wants to know in case he opts for the ULIP Plan as proposed by his friend what will be the approximate accumulation at the end of 10 years on his survival and what will be the claim proceeds if he will be pass away at the end of 5 years since inception of policy?

a) Rs. 5,22,000, Rs. 6,99,000 b) Rs. 5,03,000, Rs. 5,00,000 c) Rs. 5,03,000, Rs. 7,00,000 d) Rs. 5,22,000, Rs. 6,52,000

13) Akshay Kumar, aged 30, life expectancy 75, is working with a leading Indian corporate as a project

manager for the last 7 years in Ahmadabad. His wife, Twinkle, aged 29, life expectancy 80, is a house wife. You have pointed out to Akshay that presently he is not adequately covered under life insurance. Considering that he meets an immediate unforeseen event Akshay would like to provide his family an amount of Rs. 6 lakh p.a., inflation linked, starting from today, till Twinkle is alive. What approximate amount of life insurance should Akshay be covered for if the proceeds of such a cover would be invested in long term debt and long-term equity in the ratio 90:10. (Inflation rate :4%pa, Equity return -15% pa, Debt return – 9% pa)

a) Rs. 113.22 lakh b) Rs. 109.40 lakh c) Rs. 106.56 lakh d) Rs. 104.89 lakh




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14) Abhishek, aged 46 years and Sonali, aged 43 years. The life expectancy of Abhishek and Sonali are 80 and 77 years. Abhishek has total Insurance cover of Rs. 40 lakh. The normal living household expenses for the family work out to be approximately Rs. 70,000 per month, out of which Rs. 15,000 is of Abhishek’s personal expenses.

Abhishek wants to know what approximate additional life insurance cover he needs if any eventuality with his life today, then his family should receive their present household monthly expenses net of Sonali's contribution as well as adjusted for inflation every month for the remaining expected life of Sonali. Sonali contributes Rs. 15,000 p.m. towards household expenses. Assume life insurance claim proceeds are invested by Sonali in risk free instruments yielding 6% pa and rate of inflation is 5% p.a.

a) Rs. 140 lakh b) Rs. 100 lakh c) Rs. 150 lakh d) Rs. 190 lakh

15. The earning member of a family aged 35 years expects to earn till next 25 years. He expects an annual growth of 8% in his existing net income of Rs. 5 lakh p.a. If he considers an average investment yield of 6% till his life expectancy of 80 years, what economic value could be ascribed to his life today? a. 1.01 cr b. 1.20 cr c. 1.58 cr d. 3.50 Cr 16. A single mother, aged 33, earns Rs. 7.5 lakh p.a. out of which taxes and self-expenses account for Rs. 1.5 lakh p.a. Her salary is expected to rise 10% p.a. whereas taxes and personal expenses are likely to rise by 6% p.a. If she expects to work till 58 years, what economic value can you enumerate on her life, if she is confident of getting a return of 9% p.a. from investments? (a) Rs. 1.67 crore (b) Rs. 1.82 crore (c) Rs. 2.10 crore (d) Rs. 1 crore 17. In the Money back insurance policy of Sonali sum assured is Rs.1,00,000, policy term is 15 years, annual

premium is Rs. 9832. He will get a 15% survival benefit at the end of 3rd/6th/9th & 12th year of the policy and 40% at maturity along with simple reversionary bonus of Rs. 35 per thousand plus a terminal bonus of 10% of the sum assured. She wants to know the underlying IRR in this policy if a stand-alone term insurance for Rs.1 lakh is available at an annual premium of Rs. 550 for her. According to you it is per annum.

a) 2.99% b) 1.87%




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c) 6.78% d) 5.74%

18. A life insurance company is offering a life insurance policy for Dharminder wherein 20 annual contributions of Rs. 50,263 starting from today give anyone of the following three maturity figures after deduction of total charges and with a sum assured of Rs. 1 Crore for the whole term as follows:

i) Guaranteed Maturity Benefit: Rs. 7,41,741 ii) Non-Guaranteed Maturity Benefit @10% p.a. Rs. 9,08,071 iii) Non-Guaranteed Maturity Benefit @12% p.a. Rs. 14,60,179 The policy has a provision that in case of any casualty with the life insured, the company shall be paying higher of the then available fund value or applicable sum assured. He wants to know the minimum and maximum possible IRR in this policy based on above projections as provided by the company if a stand-alone term insurance of Rs. 1 Crore is available for Rs. 27,000 per annum. According to you the same is ___________________.

a) 4.25% p.a. and 9.97% p.a. b) 4.25% p.a. and 6.00% p.a. c) 6.00% p.a. and 9.97% p.a. d) (2.99%) p.a. and 3.43% p.a.

19.

Employee's Gross salary per annum 1,000,000 Rs. Estimated tax during the year 210,000 Rs. Family's monthly expenses 25,000 Insurance premium (annual) 20,000 Rs. Existing insurance cover 6,000,000 Rs. Investment yield available on investing funds till retirement 10% p.a. Number of remaining years to retirement 28 years

Goal: The anticipated increase in the Employee's post-tax salary is 5% year on year. The employee consumes 25% of regular household expenses on self. What should be the amount of additional insurance required to replace the Employee's income contribution to his family for his remaining year’s employment?

a) Rs. 48 lakh b) Rs. 51 lakh c) Rs. 55 lakh




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20. You observe that your client has a life insurance cover of only Rs. 20 lakh. He tells you that living expenses for the future 30 years for his family must be insured along with his essential goal of medical/higher education of his son and daughter when they attain their respective age of 18 years. The details are given below:

The rate of return which is expected for the funds to be invested 7% p.a. Inflation for living expenses 5.50% p.a.

Current household expenses

600,000 p.a. Age of son 17 years Medical education of son to begin after a year and required for 5 years

Current Cost of medical education

500,000 Rs. p.a. cost escalation of medical education 8% p.a. Age of daughter 15 years Higher education of daughter to begin after three years and required for 3 years

Cost of higher education for daughter

300,000 Rs. p.a. cost escalation of higher education for daughter 10% p.a.

You suggest the client that the aggregate insurance cover should suffice to meet higher education expenses when due, along with inflation-adjusted living (household) expenses to the extent of 80% of their current expenses for immediate next 10 years and 50% for the succeeding 20 years. You compute the amount of additional insurance cover needed, which comes to _____.

a) Rs. 92 lakh b) Rs. 106 lakh c) Rs. 126 lakh

21. Aamir, aged 44 years with life expectancy 70 years, is self-employed in Amritsar. Aamir has invested in a s Unit Linked Pension Plan has total of 15-year premium paying term and the vesting date at his age of 55 years. The investment is Rs. 36,000 p.a. in the accumulation phase. After which he has an offer to purchase an immediate annuity pension plan from the same insurance company by investing whole of the accumulated amount, for which they have projected a fixed pension of Rs. 11,500 p.m. for 15 years in annuity due mode. This immediate pension plan is ‘without return of purchase price’.

Aamir wants to know if he purchases an immediate annuity pension plan at the time of vesting date which would be ‘with return of purchase price’, how much premium should he pay further in the accumulation phase every year starting from today till the remaining premium paying term to be able to get same Rs. 11,500 p.m. for 15 years in annuity due mode




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Assume the insurance company is able to generate 10% p.a. rate of returns now onwards till the vesting date and the same rate of returns as projected by them earlier in the immediate annuity pension. (Please ignore any charges if applicable)

a) Rs. 28,432 b) Rs. 66,702 c) Rs. 53,907 d) Rs. 77,877

22. LIFE INSURANCE COVER: You estimate life cover for your client who is 32 years old, has Rs. 25 lakh in loan liabilities, has a non-working spouse of age 30 and children of age 7 years and 5 years. Additionally, the client wants higher education for each of his children Rs. 30 lakh after 15 years and marriage expenses of Rs. 15 lakh after 20 years. Both are considered at current costs. Their present household expenses are Rs. 50,000 per month which includes housing loan EMI of Rs. 15,000. The client consumes per month Rs. 8,000 on self. You additionally provide for 30 years' living expenses after the spouse's age of 55 considering she would require only 60% of expenses thereafter. He has an insurance cover of Rs. 40 lakh presently and his financial investments are Rs. 15 lakh. The additional quantum of life insurance cover is _____. (average inflation of 5% and the claim amount invested to yield 8% p.a.)

a) 104 Lakh b) 144 lakh c) 102 lakh

23. A With profit life insurance policy with a track record of offering bonuses at Rs. 50 per thousand sum assured (SA) has a premium differential of Rs. 30 per thousand SA from the similar pure term policy. The corresponding pure term cover of 20 years and SA Rs. 12 lakh is available at Rs. 7,860 p.a. Your client has recently paid 16th premium in the With Profit policy. You evaluate the differential returns from With Profit policy in case of mortality today from the perspective of 8% p.a. return. You find that ___. (a) The return on with profit policy is lower by 3.35% p.a. (b) The return on with profit policy is lower by 2.22% p.a. (c) The return on with profit policy is lower by 4.41% p.a. (d) The return on with profit policy is lower by 5.10% p.a. 24. A business man bought a piece of land in March, 2002 for Rs. 80 lakh. He got a factory built on the land at a cost of Rs. 90 lakh, the factory became operational on 1st September, 2005. The land prices have appreciated at 15% per annum in the period and the construction cost has escalated at 12% per annum since 2005. At what value the factory should be insured in April, 2013 on Market Value basis if the depreciation on factory premises is charged at 6% per annum on straight line method? (a) Rs. 2.43 crore (b) Rs. 76 lakh (c) Rs. 1.16 crore (d) 49.5 Lakh




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Retirement Planning

Types of Annuities a) Immediate Annuity – Here, you begin to receive payments from the Insurer immediately. For example, upon retirement, an individual can purchase an immediate annuity with his accumulated retirement corpus. An immediate annuity makes fixed payments to the individual at regular intervals (as chosen by him) determined mostly by an individual’s age, life expectancy and size of annuity payment. AS per FPSB India, wherever immediate annuity question come use Type 1 in calculation.

b) Deferred Annuity: In this type of annuity contract that delays payments of income, installments or a lump sum until the investor elects to receive them. This type of annuity has two main phases, the savings phase or accumulation phase in which you invest money into the account, and the income phase or distribution phase in which the plan is converted into an annuity and payments are received. Example: Mr. Sham (Age 32) Invest annually for his retirement corpus till the age of 50. But want to receive from the age of 60. So, period of 50 to 60 without contribution shows deferred annuity.

Annuity/ Perpetuity

• An Annuity is a regular series of payments. • Payments may continue for a specified period (Annuity Certain) or forever (Perpetuity) • If payments are made at the end of each time period, they are said to be paid in arrear or ordinary

annuity. If payments are made at the beginning of each time period, they are said to be paid in advance or annuity due.

• The difference between an ordinary annuity and an annuity due is of one time period only. Because each annuity payment is allowed to compound for one extra period, the value of an annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+intrest rate) Annuity Due = (1+i) x Ordinary Annuity

Growing Annuity In this case each cash flow grows by a factor of (1+g). The future value of a growing annuity (FVA) formula has five variables, each of which can be solved for FV(A) = Future value of Annuity at the time N

• A = Initial payment • R= Interest rate compounded for each period of time • G= Growing rate compounded for each period of time • N= Number of payment periods • FV (A) = A * ((1+r) ^n – (1+g) ^n)/(r-g)

In case of Annuity Due, annuity payment is allowed to compound for one extra period, the value of an annuity-due is equal to the value of the corresponding ordinary annuity multiplied by (1+i)

Annuity Due = (1+i) x Ordinary Annuity




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Immediate Annuity Plan It is an Immediate Annuity plan, which can be purchased by paying a lump sum amount. The plan provides for annuity payments of a stated amount throughout the life time of the annuitant. Various options are available for the type and mode of payment of annuities. Type of Annuity:

1. Annuity payable for life at a uniform rate. 2. Annuity payable for 5, 10, 15 or 20 years certain and thereafter as long as the annuitant is alive. 3. Annuity for life with return of purchase price on death of the annuitant. 4. Annuity payable for life increasing at a simple rate of 3% p.a. 5. Annuity for life with a provision of 50% of the annuity payable to spouse during his/her lifetime on death of

the annuitant. 6. Annuity for life with a provision of 100% of the annuity payable to spouse during his/her lifetime on death of

the annuitant. 7. Annuity for life with a provision of 100% of the annuity payable to spouse during his/ her life time on death

of annuitant. The purchase price will be returned on the death of last survivor. You may choose any one. Once chosen, the option cannot be altered. Sample Annuity Rate as on 1st March 2020 of a LIC Plan: Amount of annuity payable at yearly intervals which can be purchased for Rs. 1 lakh under different options is as under:

Age last birthday

Yearly annuity amount under option given above

(1) (2) (15 years certain)

(3) (4) (5) ( 6) (7)

30 6750 6730 6430 4870 6640 6530 6410 40 7080 7020 6470 5230 6870 6680 6430 50 7710 7530 6520 5900 7330 6990 6470 60 8930 8390 6600 7140 8220 7620 6530 70 11650 9460 6730 9820 10130 8970 6620 80 17410 10080 6920 15440 14170 11940 6760




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Defined Benefit Plans In Defined benefit plans, benefits to be paid to the employee are defined in advance. Here the employer funds the plan and the employee reaps the rewards upon retirement. The employer has to use actuarial assumptions like retirement age, mortality, expected life span, expected compensation increase and other demographic assumption to estimate the pension liability and accordingly contribute in the pension plan Defined Contribution Plans In DC Plans, the contribution to the pension plan by the employee is fixed (say 12% of salary) and the same is matched by the employer. The money is placed in the investment instruments selected by you in your investment account. After you retire, these investments along with interest are used to buy pension or annuity. However, under DC plan, one cannot be sure of the final pension amount at retirement. Ultimately, the pension benefit that you are going to receive after your retirement will depend upon the performance of the investment made on your behalf.

Public Provident Fund (PPF)

The Public Provident Fund Scheme is a statutory scheme of the Central Government of India for 15 years. PPF A/c matures after expiry of 15 years from the end of FY in which the a/c was opened. For. Exp. If A/c is opened in the FY 2000-01 the A/c will mature on 01- April 2016.

The applicable interest rate is compounded annually. Interest is notified by Govt. of India, at the end of each year. Interest shall be allowed for calendar month on the lowest balance at credit of an A/c: the close of fifth day and end of the month shall be credited at the end of each year.

The minimum deposit is 500/- and maximum is Rs. 1.5 lakh /- in a FY. One deposit with a minimum amount of Rs.500/- is mandatory in each financial year. The account in

which deposits are not made for any reasons is treated as discontinued account and such account cannot be closed before maturity. The discontinued account can be activated by payment of minimum deposit of Rs.500/- with default fee of Rs.50/- for each defaulted year

The deposit can be in lump sum or in convenient installments, not more than 12 Installments in a year or two installments in a month subject to total deposit of Rs.1,50,000/-.

Account can be opened by an individual or a minor through the guardian. A person can have only one A/c in his name. Two a/c at different places anywhere in India are not permitted.

HUF’s & NRI’s not eligible to open PPF a/c Joint account is not permissible. The deposit in a minor account is clubbed with the deposit of the account of the Guardian for the

limit of Rs.1.5 lakh/-. Pre-mature closure of a PPF Account is not permissible except in case of death. The account holder has an option to extend the PPF account for any period in a block of 5 years on

each time.

In Post maturity continuation, without fresh subscriptions, any amount in part or full can be withdrawn in installment but not exceedingly once in a year.




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In Post maturity continuation, with fresh subscriptions, one can withdraw upto 60% of balance at

the commencement of each extended period in one or more Installments but only once per year.

The PPF scheme is operated through Post Office and Nationalized banks. Deposits in PPF qualify for rebate under section 80-C of Income Tax Act. The interest on deposits is totally tax free. The balance amount in PPF account is not subject to attachment under any order or decree of court

in respect of any debt or liability.

In PPF A/c the Investor can borrow any time after the expiry of one year from the end of the year in which initial subscription is made but before expiry of five year from the end of FY in which initial subscription is made. The amount of Loan cannot exceed 25% of the balance in A/c at the end of immediately preceding year in which loan is applied for.

• Partial Withdrawals are allowed in FY calculated by addition of 6 to the FY in which account was

opened and every year thereafter. An account holder can withdraw 50% of his balance at the end of the 4th or the 1st previous financial year, whichever is lower.

• For example: If the account is opened in Financial Year 2000-2001. You may add 6 years to the

financial year end i.e. 2001+6=2007 (FY 2006-2007). Accordingly, the 4th preceding year will be 2007-4= 2003 (FY 2002-2003) and preceding year will be 2007-1= 2006 (FY2005-2006).

So, the amount of 1st withdrawal in the 7th year, FY 2006-2007 is 50% of the balance to the credit as

on 31-03-2003 or 30-03-2006, whichever is lower.

Employee Provident Fund Employee Provident fund or EPF is a fund made up of contributions by the employee during the time he has worked, along with an equal contribution from the employer. In the absence of any social security cover for the elderly in India, employee provident fund not only provides monetary security and helps them meet daily living expenses; it also helps them live a life of dignity and respect after retirement.

EPF is open only for salaried employees of private sector organizations. It is compulsory for each employee of organizations with 20 employees or more. NPS is compulsory for Government employees who have joined service after April 2004. However, NPS is also open to general public including businessmen, self-employed, housewives and persons working in organized/un-organized sector. Thus, a private sector employee can do his retirement planning by using both the options i.e. EPF as well as NPS but a businessman or a self-employed person can do his retirement planning only through NPS or in a limited manner through PPF.




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The employee contributes 12% of his basic salary in his/her EPF A/c and matching contribution is made by employer i.e. 12% of basic salary in this fund. Employer’s contribution upto 12% of basic salary is tax free in the hands of employee. Employee contribution of 12% is eligible for deduction u/s 80 C. An amount Equal to 8.33% of basic salary is polled into the EPS from Employer’s 12% contribution. In other words, 3.67% share of Employer’s contribution goes to EPF & remaining 8.67% is go to Employee Pension Scheme (EPS). The employer has option to contribute 12% of basic salary or Rs. 15000/- pm whichever is lower, for contribution as per current law. Employee Pension Scheme is applicable to all members who contribute in EPF A/c. In EPS scheme a pension is given to member to provide Income when they are no longer earning a regular income from employment. The pension can be given to member if alive or spouse and two children below 25 years of Age (if member is not alive).

EPS has lots of restrictions & Capping

The maximum that can go into EPS is 8.33% of Employer’s share but basic pay is capped at Rs. 15000. So, the amount comes to Rs. 1250 each month. The employee doesn’t know as to how much it grows to. On retirement, the corpus amount is not available to employee but lifetime pension begins. Now as because the funding of EPS is capped, the pension that one will get is also capped and based on a formula.

(Pensionable Salary*Service period) /70

The Pensionable salary is capped at Rs. 15000 and service period at 35 years. The maximum monthly pension would be Rs. 7500.To eligible for pension, one has to work minimum 10 years continuously.

From September 1st 2014, EPS is only for those new members earning less than Rs. 15,000. Therefore, new employees whose basic salary is more than Rs. 15,000 will not see any diversion of 8.33 % (of employer’s share) towards EPS. For Older Employees, the diversion will however, continue.

Withdrawal from EPF EPF Maturity Proceeds is exempt from Income Tax. A person who is a member of Employee Provident Fund can withdraw money upon reaching the age limit prescribed by the government, as of now, it is 55 years in India, or upon actual retirement. Additionally, fund may be withdrawn to meet expenses such as construction or acquisition of property or repayment of loan taken for same, treatment of illness, marriage expenses. Full withdrawal from EPF before 5 year of service is added in taxable Income & also subject to TDS. Voluntary Provident Fund (VPF) Persons covered under the Employee Provident Fund (EPF) can choose to contribute over and above the mandatory 12% of the basic and dearness allowance, to their EPF account under the Voluntary Provident

Fund. There will be no employer contribution to match any contribution made by the




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employee under the VPF. The investment into the VPF will also be deducted by the employer from the salary and deposited in the EPF pool. The employer must be given instructions on the percentage of additional deduction that has to be made from the salary for the VPF. The rate of contribution can be changed by the employee which will be given effect to from the beginning of the next accounting period of the fund. The VPF will earn the same returns as the EPF.

Employees can contribute up to 100% of their basic salary and dearness allowance towards the scheme. It is not mandatory for employers or employees to contribute to the VPF. However, the scheme has a lock-in period of 5 years. Investment in the VPF has tax benefits under Sec 80 C of the Income Tax Act, 1961. Interest earned is exempt from tax.

Since the VPF scheme is an extension of the EPF, only salaried employees who receive payments on a monthly basis in their salary accounts are eligible to invest in the scheme. The rate of interest of VPF is decided by the Government of India on a yearly basis.

Gratuity Gratuity is a part of salary that is received by an employee from his/her employer in gratitude for the services offered by the employee in the company. As per Payment of Gratuity Act 1972, gratuity is paid when an employee Complete 5 or more years of full-time service with the employer. Gratuity is a defined benefit plan and is one of the retirement benefits offered by employer to employee on leaving his job. An employer may offer gratuity out of his own funds or may approach a life insurer in order to purchase a group gratuity plan. In case the employer opted for a life insurer, he has to pay annual contributions as decided by the insurer. a) For employees covered under the Gratuity Act There is a formula using which the amount of gratuity payable is calculated. The formula is based on the 15 days of last drawn salary for each completed year of service or part of thereof in excess of six months. The formula is as follows: (15 X last drawn salary X tenure of working) divided by 26 Here, last drawn salary means basic salary, dearness allowance and commission received on. Suppose A's last drawn basic pay is Rs 60,000 per month and he has worked with XYZ Ltd for 20 years and 7 months. In this case, using the formula above, gratuity will be calculated as: (15 X 60,000 X 21)/26 = Rs. 7.26 lakh




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In the above case, we have taken 21 years as tenure of service because A has worked for more than 6 months in year. Had he worked for 20 years and 5 months, 20 years of service would have been taken into account while calculating the gratuity amount. There is an upper limit on the gratuity benefit amount payable to the employees. For Govt. employees Rs.20 Lakh from 1st -jan-2016 earlier it was Rs. 10 Lakhs For non Govt employees Rs.20 Lakh from 29th – March -2018 earlier it was Rs. 10 Lakhs As per the government's pensioners' portal website, retirement gratuity is calculated like this: one-fourth of a month's basic pay plus dearness allowance drawn before retirement for each completed six monthly period of a qualifying service. The retirement gratuity payable is 16 times the basic pay subject to maximum of Rs 20 lakh. In case of death of an employee, the gratuity is paid based on the length of service, where the maximum benefit is restricted to Rs 20 lakh. Tax treatment of Gratuity The gratuity so received by the employee is taxable under the head ‘Income from salary’. In case gratuity is received by the nominee/legal heirs of the employee, the same is taxable in their hands under the head ‘Income from other sources’. In case of government employees – they are fully exempt from income tax. In case of non-government employees covered under the Payment of Gratuity Act, 1972 – Maximum exemption from tax is least of: I. Actual gratuity received; or II. Rs. 10,00,000; or III. 15 days’ salary for each completed year of service or part thereof Note: • Here, salary = Basic Salary + Dearness Allowance + commission (if it’s a fixed % of sales turnover). • Completed year of service or part thereof’ means: full time service of More than 6 months is considered as 1completed year of service; less than 6 months is ignored. • Here, number of days in a month is considered as 26. Therefore, 15 days’ salary is arrived as = salary * 15/26 In case gratuity is received from more than one employer during the previous year, maximum exemption allowed is up to Rs 10 lakh.




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Senior Citizen Savings Scheme:

• Applicable interest rate payable quarterly on 30th June, 30th Sept,31 Dec,31st March • Minimum Deposit: Rs 1000 and multiples thereof. • Maximum Limit: 15 Lakhs. • The scheme is for 5 years and can be extended for a further period of 3 years. • Premature closure facility is available after 1 year with nominal penalty. • Individual aged of 60 years and above can invest. • Retiring employees by VRS aged 55 years and above can invest under scheme. Provided the a/c is

opened within 3 months from the date of receipt of retirement benefits • Joint account can be opened with spouse. • Interest income taxable but no TDS.

Superannuation Benefit

The existing mandatory retirement benefits are very often found to be insufficient to meet the income replacement required at retirement. Employers provide superannuation plans to augment the benefits available by contributing to a superannuation fund. The company has to appoint trustees to administer the scheme and get the scheme approved by the Commissioner of Income Tax.

A company can offer a group superannuation scheme in two ways:

• Through the constitution of a trust fund where fund managers are appointed by the trustees to manage the fund.

• Through investment in a superannuation scheme from a life insurance company.

On retirement the employee is allowed to take one third of the accumulation in his account as commutation. Commutation refers to the exercise of the facility of taking a portion of the annuity corpus in a lump sum. The balance in the corpus is used to purchase an annuity. Apart from LIC, all other life insurance companies allow its customers to purchase annuity from any annuity provider. Income Tax rules restrict the employer’s contribution, whether to the PF or superannuation fund or a combination of both, to 27% of the employee’s earnings. Also, Employer’s contribution to Superannuation fund exceeding Rs. 1.5 Lakh p.a. is considered as perquisite for employee for Income tax purpose.




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National Pension System (NPS) for Government Employees

All central government employees who joined service after January 1, 2004, are enrolled into the NPS which is a defined contribution pension plan. 10% of the employee’s basic salary plus dearness allowance is credited to the individual account along with the government contribution. The individual account is identified by a unique Permanent Retirement Account Number (PRAN). The balance in the individual account can be withdrawn on retirement at 60, resignation or death while in service. On retirement, a minimum of 40% of the corpus has to be used to buy a life annuity and the remaining can be taken as a lumpsum. On resignation, 80% has to be annuitized and the remaining can be withdrawn. In case of death, the balance in the account is paid out to the nominees.

Voluntary Retirement Schemes

The mandatory retirement benefits are available only to employees of covered establishments as defined in the respective regulations. This leaves people in other establishments, self-employed persons and others out of the coverage of the benefits. Retirement plans are available that an individual can subscribe to independently. Such schemes can be used to save for retirement by people who do not have mandatory cover and also by persons who are covered to augment their retirement benefits. Investment products that can be used to save for retirement voluntarily by any individual eligible to invest include the National Pension System (All-Citizen Model and Corporate Model), Public Provident fund, Schemes of mutual funds and insurance companies.

National Pension System (NPS)

The NPS is a defined contribution scheme launched in May 2009 by the Government of India for all citizens on a voluntary basis. The contributions made by an individual to the fund are managed to create a retirement corpus. The NPS system consists of the NPS trust, central recordkeeping agency, pension fund managers, trustee bank and custodian.

NPS Trust

A trust set up under the Indian Trusts Act, into which the contribution of subscribers is pooled and held in their beneficial interest. The trust has the fiduciary responsibility for taking care of the funds and protecting the subscriber interests.

Points of Presence (PoPs)




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A PoP is the first point of interaction between the subscriber and the NPS. Subscribers open their NPS accounts by completing the documentation and formalities with the PoPs. The registered PoPs have authorized branches to act as collection points and extend services to customers.

Central Record-keeping Agency (CRA)

The CRA is the back-office for maintaining subscriber records, administration and customer service functions. NSDL e-Governance Infrastructure Ltd has been designated the CRA for the NPS.

CRA- Facilitation Centers

These are entities appointed by the CRA to provide various services to PoPs. CRA-FCs will typically have multiple branches around the country.

Pension Fund Managers

These are professional fund managers appointed to invest the corpus in a portfolio of securities and manage them. Currently the fund managers are – ICICI Prudential Pension Funds Management Company Ltd., LIC Pension Fund Ltd, Kotak Mahindra Pension Fund Ltd., Reliance Capital Pension Fund Ltd., SBI Pension Fund Pvt. Ltd., UTI Retirement Solutions Ltd, and HDFC Pension Management Co Ltd, Birla Sunlife Pension Management Ltd.

Trustee Bank

The trustee bank handles the funds side of the transactions between various entities. Axis Bank Ltd is the designated bank to facilitate fund transfers across subscribers, fund managers and the annuity service providers.

Annuity Service Providers (ASP)

ASPs are appointed by the PFRDA to provide the annuity to the subscribers through their various schemes. Investors can choose any ASP from which to buy the annuity and the ASP will provide the monthly pension to the subscriber for the rest of their lives.

Custodian

The custodian handles the security side of the transactions. The securities bought for the NPS trust are held by the custodian, who also facilitates securities transactions by making and accepting delivery of securities. The NPS has appointed the Stock Holding Corporation of India Ltd as the custodian.

PFRDA (Pension Funds Regulation and Development Authority) is the designated agency responsible for the regulation and development of pension products.




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Joining the NPS

1. NPS-All-Citizen Model

Any Indian citizen not less than 18 years of age and not more than 65 years of age can join the NPS by registering at any of the PoPs. On enrolling, the CRA (NSDL/Karvy Computershare) will allot a Permanent Retirement Account Number (PRAN) to the individual. The first contribution to the account has to be made at the time of registration.

The minimum amount per contribution is Rs.500 and the minimum contribution in a year is Rs.1000. The minimum number of contributions in a year is 1. There is no maximum limit. The contributions can be made by cash, local cheque, and demand draft or through electronic transfer. If the minimum annual contribution of Rs.1000 is not made to the account, the account becomes dormant. The account can be revived by depositing the minimum required amount for each year of default along with the penalty specified from time to time.

2. NPS-Corporate Model:

Companies registered under the Companies Act, Central and State Public Sector Enterprises and other specified entities can register under the corporate model. The corporate may directly approach a PoP as an entity for its employees to join the NPS. The employees enrolled by the corporate (employer) will be registered as subscribers and will each have an account. Choice of fund manager and scheme may be made by the employer or employee, as agreed.

Types of NPS Accounts

There are two types of accounts that the NPS offers - Tier I account where the contribution cannot be withdrawn and a Tier II account where the contribution can be withdrawn at any time. To have a Tier II account the individual must have a Tier I account.

NPS – Investment Fund Options

The funds contributed will be managed according to the investment mix selected by the contributor. The portfolio thus selected will be created and managed by the fund manager selected at the time of registering from among the approved fund managers.




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Investors can select from between the Active choice and the Auto choice. The fund options in the NPS are:

E: High return, High risk – Investments predominantly in equity market instruments

C: Medium return, Medium risk- Investments predominantly in fixed income instruments

G: Low return, Low risk- Investments purely in fixed investment products

A: Investment in Alternative Investment Schemes including instruments such as REITs, Alternative Investment Funds, Mortgage Backed Securities and other approved investments.

A subscriber can choose to invest the entire corpus in C or G. However, investment in E is capped at 75 per cent and up to a maximum of 5% in asset class A. Any combination of the funds can be chosen to apportion the corpus within the limits specified.

Investors who cannot make the choice between options can opt for the Auto Choice Option. The Auto Choice provides three lifecycle funds where the proportion in the asset class will differ according to the age of the subscriber.

LC75 is the Aggressive Lifecycle Fund. The exposure to equity starts with 75% till age 35 and then gradually reduces as per the age of the subscriber

LC50 is the Moderate Lifecycle Fund. The exposure to equity starts with 50% till age 35 and then gradually reduces as per the age of the subscriber.

LC25 is the Conservative Lifecycle Fund. The exposure to equity starts with 25% till age 35 and then gradually reduces as per the age of the subscriber.

The default option, if the subscriber does not make a choice, is the Moderate Lifecycle Fund.

Taxation NPS Contributions made by the subscriber is exempt from tax up to a limit of Rs.1.5 lakhs. This limit covers the deductions available under section 80C, 80CCC and 80CCD(1) and 80 CCD (2).

Employee’s contribution under Section 80CCD(1) is allowed to an individual who makes deposits to his/her NPS. Maximum deduction under Section 80CCD (1) allowed is 10% of salary in the previous year (in case the taxpayer is an employee) or 20% of gross total income in the previous year (in case the taxpayer being self-employed) or Rs 1,50,000, whichever is less.




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The employer’s contribution up to a limit of 10 percent of the basic salary and dearness allowance is also allowed as deduction under section 80CCD(2) to the employee.

An additional deduction on investment up to the extent of Rs.50,000 is allowed under a section 80 CCD (1B).

Exit from NPS When a subscriber attains the age of 60 years or superannuates then at the time of exit, the contributor has to mandatorily utilize at least 40% of the accumulated corpus to buy an annuity for a monthly or a periodical pension. The remaining sum can be withdrawn as a lumpsum either at once or in a phased manner.

All subscribers shall have the option to defer the purchase of annuity for a maximum period of three years, from the date of attainment of sixty years of age or the age of superannuation, as the case may be. Such subscribers have the option to defer the withdrawal of the lump sum amount until he or she attains the age of seventy years.

Exit before turning 60 years is possible through an option to withdraw 20 per cent of the accumulated savings and compulsorily buy an annuity with the remaining 80 per cent, provided the subscriber has completed 10 years in the NPS.

Partial Withdrawal before NPS

Yes, NPS Subscriber can withdraw certain amount out of his own contribution. It is considered as partial withdrawal under NPS, for Conditions of partial Withdrawal,

Following are the conditions of Conditional Withdrawal:

Subscriber should be in NPS at least for 3 years Withdrawal amount will not exceed 25% of the contributions made by the Subscriber Withdrawal can happen maximum of three times during the entire tenure of subscription. Withdrawal is allowed only against the specified reasons, for example;

• Higher education of children • Marriage of children • For the purchase/construction of residential house (in specified conditions) • For treatment of Critical illnesses




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Reverse Mortgage A reverse mortgage is a loan available to senior citizens to cover their retirement expenses. As its name suggests, it is exactly opposite of a typical home loan, where repayments are made to the housing finance company (HFC)/ bank every month until the tenure of the loan. Reverse mortgage is so named because the payment stream is reversed, that is instead of the borrower making monthly payments to the lender, the lender makes payments to the borrower. A Reverse Mortgage Loan will be settled by proceeds obtained from sale of the house property mortgaged. After the final settlement, the remaining amount (if any) will be given to the borrower or his/her heirs/beneficiary. However, the borrower or his/her heirs may repay the loan from other resources without bringing the property to sale. Process: Once you pledge your house for reverse mortgage with any HFC/ bank, the HFC/ bank estimates the value of the house. Then, taking into account the cost of credit, it makes monthly payments to you. The loan is typically settled after the death of the owner/co-owners. Eligibility Criteria 1. Indian citizen of 60 years or more, 2. Married couples will be eligible as joint borrowers for joint assistance. In such cases, the age criteria for the couple would be at the discretion of the RML lender, subject to at least one of them being above 60 years of age and the other not below 55 years of age. 3. Should be the owner of a residential property (house or flat) located in India, with clear title indicating the prospective borrower’s ownership of the property. 4. The residential property should be free from any encumbrances. 5. The residual life of the property should be at least 20 years. There is no minimum period of ownership of property required. 6. The prospective borrower(s) should use that residential property as permanent primary residence. 7. The maximum loan amount is Rs.1 crore along with interest. & Lump sum pay-out is permitted in the event the borrower or his spouse has to undergo medical treatment. The maximum limit on that is Rs.15 lakhs. All receipts under RML shall be exempt from income tax under Section 10(43) of the Income-tax Act; 1961.Any transfer of a capital asset in a transaction of reverse mortgage shall not be regarded as a transfer. A borrower, under a reverse mortgage scheme, will be liable to income tax (in the nature of tax on capital gains) only at the point of alienation of the mortgaged property by the mortgagee for the purposes of recovering the loan. Example: Mr. Sudhir Aged 62 years want to take a reverse mortgage loan from Bank Property Value(PV) = 1 Crore LTV Ratio(LTVR)=80% Loan Disbursement Period=15 Years




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Disbursement Frequency=Monthly Interest Rate(IR) = 10.5 % Calculations: On the basis of the inputs: The disbursement frequency selected is Monthly so “rate” will be IR/12(i.e. 10.5%/12) No. of instalment payments(n) will be calculated monthly e.g. if 15 is selected then the nper=15*12=180 Putting the values in the formula FV : 10000000*80% = 80 Lakh PV - 0 Type - 1 Instalment Amount PMT =Rs.18272;




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Retirement Planning - Questions for Practice

1. Mr. Govind aged 32 years is an IT Professional. His overall household expenses are 240000 p.a. which is increase by 3% above inflation every year till he retires as he is not satisfied with his present standard of living. He wishes to retire at age 55 and life expectancy assumed to be 75 years. Inflation is assumed to be 6% throughout and expected return on investments is 12% p.a. What amount he needs to invest each month from now each month to build nest egg?

a) 16253 b) 16850 c) 15420 d) 13065

2. Amit, aged 46 years, plans to retire at 60 years of age. The life expectancy of Amit is 80 years. You have estimated that he will require an inflation adjusted Rs. 1.1 lakh in the beginning of every month post retirement for household expenses.

He would invest every year Rs. 1, 50,000 in Equity Mutual Funds starting from now till one year prior to his retirement. He invests in Debt based Mutual Funds after retirement. Amit would set aside 23.79 lakh of his existing Equity shares portfolio to invest the same for his retirement corpus. What will be the surplus/deficit in the required corpus at the time of retirement? (Please ignore charges and Taxes if applicable) (Inflation -5% pa, return on equity MF scheme – 12% pa, Return on Equity shares – 13% pa, return on debt MF – 7% pa)

a) Deficit of Rs. 16 lakh b) Surplus of Rs. 12 lakh c) Deficit of Rs. 31 lakh d) Deficit of Rs. 34 Lakh

3. You advise Govind to immediately start investment for his retirement corpus. Though he is constrained

for funds due to various other priorities, you advise him to invest Rs. 50,000 every year in a Balanced MF scheme starting from 1st January, 2010. The amount should be increased by 5% in January every year so as to accumulate the corpus by 31st December, 2031. You estimate that by investing systematically in this fashion he would be able to accumulate a sizable portion of her targeted retirement corpus. If the returns from Balanced MF scheme are uniformly distributed during this period, the accumulation till 31st December, 2031 will be _________. Last Investment will make on 1st Jan 2031. (Return on balance MF scheme – 12% p.a.)

a) Rs. 73.40 Lakh b) Rs. 105.40 Lakh c) Rs. 51.80 Lakh d) Rs. 25.09 Lakh




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4. Shahrukh aged 42 years, life expectancy 70 years, is software engineer. You suggest him to accumulate retirement corpus by investing Rs. 50,000 in first year, and increasing at the rate of 6% p.a. in a Pension plan annually till a year prior to his retirement. The pension plan gives monthly pension till his life time in annuity due mode, immediately after the retirement age of 60 years. Assume the pension plan yield 10% p.a. pre-retirement and 8% p.a. post retirement. Shahrukh wants to know from you, what will be monthly amount he would receive from that pension plan. (Assume that he starts investing in the Pension Plan with immediate effect. Ignore taxes and charges) Assume rate of inflation is 6%.

A) Rs. 44,840 B) Rs. 44,300 C) Rs. 40,276 D) Rs. 50,600

5. An annuity product is designed in such a way that it gives first cash flow at 6% of the corpus at the end of first year and thereafter every year in the form of growing annuity at the rate of 5%. If the cash flows are guaranteed for 15 years, what rate of return is obtained on the corpus invested? (a) 3.04% p.a. (b) 3.91% p.a. (c) 5.07% p.a. (d) 6.41% p.a. 6. A retiree has accumulated Rs. 1.86 crore towards his retirement corpus. His current monthly household expenses are Rs. 90,000 which he needs inflation adjusted for 30 years. If he considers average inflation to be 5.5% p.a. from now onwards, what rate of return from a 30-year annuity, payable annually and deferred by one year, should meet his goal? A. 10.66% b. 10.13% c. 9.76% d. 8.46% 5. Vishal, aged 32 years, an Accountant is employed with a Private Limited company in Mumbai. Vishal and his wife Harsha, aged 30 years and a house wife. Vishal's monthly household / living expenses are Rs. 18,000. Provide for household / living expenses in his post retirement period @ 75% of pre-retirement household / living expenses. He wants such retirement corpus to last Harsha’s life time. He also wishes to be able to retire early and comfortably at age 52 years.

You have suggested to Vishal to accumulate his retirement corpus by invest an equal amount every month in Equity Mutual Fund scheme and Debt Mutual Fund scheme. You further advise to rebalance the combined portfolio after every five years in such a way that the individual portfolios have equal amount of funds. After his proposed retirement he would invest the combined accumulated corpus in Debt investment only to




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generate inflation linked monthly annuity. What equal monthly amount should he invest in each of Equity and Debt schemes starting from today?

Vishal’s expected life : 80 years Harsha’s expected life : 83 years

Inflation : 6.00% p.a. Equity Returns : 12.00% p.a. Debt Returns : 8.00% p.a.

a) Rs. 7,766 b) Rs. 17,548 c) Rs. 8,774 d) Rs. 15,532

6.

Retirement age of the individual 60 Life expectancy of the individual 80

A deferred annuity pension plan offers optional one-third commutation on the date of vesting and life certain level Annuity. The level annuity from uncommuted amount is Rs. 60,000 per month. The vesting sum of Rs. 1.5 crore is Estimated on retirement of the individual. Goal: If the individual opts to commute one-third of the expected vested amount and settles for life annuity from the remaining amount, at what rate of return the commuted amount shall be invested to yield a total income of Rs. 90,000 per month till he survives?

a) 10.07% b) 11.19% c) 12.80%

7.

Current household expenses of a couple 50,000 Rs. p.m. Current age of the client 33 years Current age of dependent spouse 30 years Retirement age of the client 58 years Life expectancy of the client 78 years Life Expectancy of dependent spouse 80 years Estimated retirement corpus the couple is confident to accumulate 30,000,000 Rs.




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Goal: The client wants to know the rate of return which would see the accumulated corpus last till the spouse's lifetime, if inflation-linked monthly expenses are drawn at 20% curtailment at the time of retirement. The inflation is considered at 5.5% p.a.

a) 8.07% b) 10.19% c) 9.44%

8. Vishal’s father wants to deposit Rs. 15 lakh in Sr. Citizen Saving Scheme in each of his and his wife’s

account. He intends to accumulate this scheme’s interest in Gold ETF which is expected to give an average monthly return of 0.75% per month (net of expense) and liquidate this investment at the time of maturity of Sr. Citizen Scheme. What would be the amount at maturity if he deposits a lump sum amount in Sr. Citizen Saving Scheme today? (Assume rate of Interest on SCSS is 9%)

a) Rs. 46.84 Lakh b) Rs. 46.58 Lakh c) Rs. 46.13 Lakh d) Rs. 63.30 Lakh

9. Shahrukh and Preeti started their PPF A/c. with Rs. 5,000 each on 3rd April 2006. On the first working day of every month they are depositing Rs. 5,000 from their respective bank accounts in their PPF Accounts. They have not updated their PPF Accounts Pass Book even for a single year. They ask you what the balance in their respective account could be as on 31st March 2009, as well as on the maturity of account, if they continue this investment up to the maximum permissible period in the same manner as they have been till now. (Consider the rate of interest in PPF A/c. for all current and future calculations to be done at 8.6% p.a.)

a) Rs. 1,94,784 and Rs. 18,19,457 b) Rs. 2,03,225 and Rs. 16,99,722 c) Rs. 2,04,935 and Rs. 20,02,105 d) Rs. 2,01,925 and Rs. 18,97,300

10. Your client, of age 34 years and aspiring to retire at 60, has Rs. 3.38 lakh in his PPF account as on 31-Mar-2015. The account matures on 31-Mar-2021. You advise him to invest Rs. 37,500 every quarter in the first five days of April, July, October and January every financial year till the account's initial maturity, and extend the PPF A/c after initial maturity till his retirement by regularly investing in the same manner. You estimate the corpus thus collected through PPF A/c on his retirement. (Consider the rate of interest in PPF A/c. for all current and future calculations to be done at 8% p.a.)

a) 155,40,750 b) 150,87019 c) 148,24,560




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11. Today is 1st Dec 2009. Ravinder wants to know from you, what is the maximum amount today he can withdraw from his PPF account as per PPF rules. No Investment has been made by him in this Financial Year till date. & PPF A/c is opened as on 4 January 2000.

Outstanding as on PPF A/c balance Rs. 31-3-2000 40,000 31-3-2001 85,000 31-3-2002 1,35,000 31-3-2003 2,10,000 31-3-2004 2,95,000 31-3-2005 3,45,000 31-3-2006 4,15,000 31-3-2007 5,05,000 31-3-2008 3,80,000 31-3-2009 4,30,000

a) Rs. 2,07,500 b) Rs. 2,15,000 c) Rs. 1,07,500 d) Rs. 1,90,000

12. Rajesh wants to know from you, in which FY he can withdraw from his PPF account & what the maximum amount of withdrawal is as per PPF rules. No Investment has been made by him in this Financial Year till date. & PPF A/c is opened as on 4 Feb 2003.

Outstanding as on PPF A/c balance Rs. 31-3-2003 40,000 31-3-2004 85,000 31-3-2005 1,35,000 31-3-2006 2,10,000 31-3-2007 2,95,000 31-3-2008 3,45,000 31-3-2009 4,15,000 31-3-2010 5,05,000

a) FY 2008-09 & Rs. 67,500 b) FY 2009-10 & Rs. 1,05,000 c) FY 2010-11 & Rs. 2,02,500




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13. An individual opened PPF account on 1st April 2007. The amount outstanding in his account on 31st March 2013 was Rs. 4,93,564. If he had a balance of Rs. 2,45,428 on 31st March 2010, what amount can he withdraw and from which date? (a) Rs. 1,22,714 from 1st April 2013 in year 2013-14 (b) Rs. 2,46,782 from 1st April 2013 in year 2013-14 (c) Rs. 1,22,714 from 1st April 2014 in year 2014-15 (d) Rs. 2,46,782 from 1st April 2014 in year 2014-15 14. An investor who opened his PPF account on 9th January 2011. Today he is 32 years old and as on 31-03-2015 he has Rs. 3.82 lakh in his PPF account. He aspires to retire at age 58 years. You advise him to contribute every year maximum permissible amount towards the end of every financial year in PPF account. The PPF account after its initial maturity would be extended till his retirement with the same discipline of maximum contributions. The rate of interest in PPF is considered to average 7% in the period until his retirement. What amount of corpus would thus be accumulated in his PPF account?

d) 12519879 e) 12405060 f) 13405300

15. A professional just retired has accumulated Rs. 40 lakh. He invests this corpus in an investment instrument giving return of 8% p.a. His current annual household expenses are Rs. 5 lakh, escalating at inflation of 6% p.a. He would rent out his other fixed property at an expected annual rent of Rs. 1.80 lakh, the rentals increasing at 6% p.a. The balance expenses are met by withdrawing from the invested corpus. The commercial property, currently valued at Rs. 50 lakh, is expected to appreciate at 8% p.a. He expects to sell the property after 15 years to create a fresh corpus for his living expenses. How long the total funds available are expected to last after 15 years? (a) 14 years 2 months (b) 16 years 3 months (c) 18 years 7 months (d) 16 years 9 months 16. A retired person has contracted a 20-year immediate annuity plan which provides an annual stream of income, increasing year-on-year at 5%. He is due to receive 5th instalment of Rs. 5.50 lakh which is 6% of the balance corpus remaining in annuity. He wants the term of the annuity to increase. He estimates that Rs. 4.75 lakh would be sufficient for his current living expenses. He proposes this to the annuity provider with other terms remaining as originally agreed. If the yield of the annuity is 6.5% p.a., how many more instalments would get added in the restructured annuity than the original? (a) 5.36 instalments (b) 6.36 instalments (c) 3.04 instalments (d) 7.39 instalments




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17. A person at age 57 has accumulated Rs. 50 lakh towards retirement funds and opts for premature retirement. He purchases an immediate annuity for a total term of 20 years, a fixed monthly amount for the initial period of 10 years and a provision to double the monthly amount in the second 10-year period. If the minimum yield guaranteed in the annuity is 8% p.a., what monthly amount he is expected to receive in the subsequent 10-year period? a. 31109 b. 62218 c. 33906 d. 63982 18 An executive planning for purchase of an annuity, when he was of 53 years and had in dependents a non-working spouse of age 48 and a son of age 25. On reaching age 60, he expects at least one, himself or his spouse, to survive till 85 years and contracts an immediate life annuity with return of purchase price at Rs. 10.15 lakh p.a. vested against the purchase price of Rs. 1.61 crore. What return is expected from the vesting date? (a) 6.73% p.a. (b) 5.76% p.a. (c) 4.25% p.a. (d) 6.304% p.a. 19. A company has retirement age as 58 years. An employee at age 35 expected increments of 7% p.a. as per company policy when his annual net earnings were Rs. 6 lakh. After 5 years, he got next cadre and his annual net earnings became Rs. 9 lakh. The increments in the revised cadre are at 9% p.a. He had purchased a life cover by income replacement method at age 35. What additional cover is required if he expects his investments to yield 9.5% p.a.? (a) Rs. 48 lakh (b) Rs. 98 lakh (c) Rs. 70 lakh (d) Rs. 57 lakh 20. A 45-year old man spends Rs. 7.5 lakh p.a., almost the amount he earns, to maintain his family. He expects his expenses to rise by 7% p.a. He has not saved for retirement. He has a second house which he wants to rent at Rs. 20,000 p.m. immediately, the rent expected to increase by 7 % p.a. You advise him to create a corpus by his age of 60 by investing the rent received in an instrument yielding 9% p.a. at the end of every year. You estimate the number of years the accumulated corpus would last taking the received rents post-retirement into account. The same is (a) over 4 years (b) over 7-1/2 years (c) 8 years (d) over 3 years 21. A 40-year-old person spending Rs. 3 lakh p.a. plans to retire at age 63 and expects to live till 75 years. The basic inflation at 7% p.a. and lifestyle inflation at 1.75% p.a. are expected in the pre-retirement period. He starts investing for retirement at Rs. 30,000 p.a. in a 10% p.a. return instrument with immediate effect, and increases the contribution by 20% every year of the prior year investment amount. If the expenses post-retirement are curtailed by 20%, what maximum inflation would sustain his corpus till he survives, if the corpus is invested at 7% p.a.? (a) 1.56% (b) 4.18% (c) 7.88% (d) 6.07%




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22. A 55-year-old individual could not save for retirement while he met his children’s education and marriage. In the next 5 years he would have Rs. 35,000 per month investible surplus. The couple has household expenses of Rs. 27,000 per month. They have a second house which earns Rs. 18,000 per month in rental income. You direct their monthly savings to an 8 % p.a. instrument. Considering this return as sustainable after retirement also, inflation at 6% p.a., rental increments at 6% p.a., you estimate the period after retirement at 60 years when they may have to start curtailing their expenses. The same is ____. (a) 13 years 5 months (b) 21 years 7 months (c) 31 years 5 months (d) 16 years 8 months 23.

Current age of the client (as on 1st April 2015) 45 years Retirement age of the client 60 years PPF account balance of client as on 31-March-2015 (maturity 1-Apr-2020)

500,000 Rs.

PPF a/c balance of the spouse as on 31-March-2015 (maturity 1-Apr-2020)

300,000 Rs.

Expected interest rate on PPF 8.00% p.a. Goal: As part of the retirement strategy, you advise client to invest a sum of Rs. 40,000 and Rs. 20,000 immediately in his and spouse’s PPF account respectively and increase this investment by 20% every year in the beginning of the Financial year in all future years till normal maturity. The contributions are rounded up to the nearest thousand. You also advise to extend their respective accounts for two terms of 5 years each beyond the normal maturity by Contributing maximum permissible amounts in both the accounts. Find the combined corpus of accounts when the Client retires.

a) Rs. 84,19,342 b) Rs. 88,75,270 c) Rs. 78,55,740

24. You advise your client aged 31 years to accumulate corpus of for retirement. The client already has in Balanced MF scheme Rs. 1.60 lakh which you advise to extend to achieve this goal. You advise him to start SIP of Rs. 5,000 every month till his age of 35 years, thereafter increase the same to Rs. 7,500 p.m. till his age 40 years, Rs. 10,000 p.m. between 40 – 50 years, and Rs. 15,000 p.m. between 50 – 56 years. You advise him to switch 25% of outstanding Balanced MF portfolio every year to Liquid schemes from age 57 until full redemption on retirement at age 60. How much of the retirement corpus would he be able to accumulate? (Rate of return Balanced MF 9% p.a., Liquid MF 5.5% p.a.)

a. 13558325 b. 13757863 c. 12769876




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25. Current age of Mr. A 28 years Current age of the spouse of Mr. A 26 years Retirement age of Mr. A 60 years Current house hold expenses 25000 Rs. Per month Life expectancy of each of Mr. A and spouse 80 Years Post-retire expenses needed till Spouse's survival as % of pre-retire. exp. 75% Current investment available to be utilized towards retirement corpus 300,000

Mr. A desires to have additional cushion of Rs. 1 crore, as terminal value from the date of last survivor towards bequest. The retirement solution can be managed at yield of 12% p.a. in the initial 10 years, moderated to return 9% p.a. in the next 10 years. In the remaining years to retirement and continuing into retirement the funds could be managed to yield 7% p.a. Inflation is considered 5.5% p.a. in the pre-retirement period and is expected to moderate at 4% p.a. in the post-retirement period. Estimate the viability of achieving this goal by investing Rs. 62,000 p.a. in the current available investment, starting immediately, which would be incremented by 5% in the beginning of every year. You analyze that _______.

Ans:

Achievable value of Bequest 4,149,381 The provision of Rs. 1 crore on bequeath is not sustainable, it could be to the extent of Rs. 40 lakh approx.) 26. Mr. A has invested annually Rs. 2 lakh towards his retirement in an aggressive fund from his age of 40 onwards. After initial high returns, the fund could generate return of just 3.5% p.a. in 10 years. He can direct a higher amount towards retirement goal in the remaining 10 years to retirement. You advise to switch half of the accumulated funds along with fresh investment in a debt fund with indicative return of 8% p.a. in the future. To achieve a target corpus is Rs. 1.2 crore, what revised amount should be invested every year if the future expectation from aggressive fund is 11% p.a.? (a) Rs. 5.33 lakh (b) Rs. 4.62 lakh (c) Rs. 1.06 lakh (d) Rs. 3.79 lakh 27. Pyare Mohan, aged 29 years, working with a life Insurance company since Dec 2005. Salary for calculation purpose is taken at Rs. 54,000 p.m. He has been receiving offers from competing Life Insurance companies and plans to resign from the present company by the beginning of April 2011. He wants to know whether he is eligible for Gratuity under the payment of Gratuity Act, 1972 and what shall be the gratuity payable in this case? (Assume organization is covered under the payment of Gratuity Act, 1972).




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a) No, he is not eligible for Gratuity b) Yes, Rs. 1,55,770 c) Yes, Rs. 1,03,850 d) Yes, Rs. 3,50,000

28. Radha had joined this private bank on 01-08-1992, her first job, as a relationship manager and is currently posted as senior manager. She wants to know from you in case she resigns from her job on 31st March 2011, what gratuity will she receive from her employer? She has informed you that she had availed maternity leaves from 1st November 2003 to 28th February 2004 and from 1st December 2007 to 15th February 2008. Assuming her employer is covered under the provisions of Payment of Gratuity Act, 1972. Salary for computation purpose is Rs. 84,000 pm.

a) Rs. 3,50,000 b) Rs. 9,20,770 c) Rs. 8,72,307 d) Rs. 10,00,000

Reverse Mortgage 29. A retiree of age 60 wants to enter into the reverse mortgage scheme by mortgaging his self-occupied house which is valued at Rs. 80 lakh. An approved lending institution agrees to provide periodic monthly payments under the scheme considering a loan to value ratio of 80% and at a rate of interest of 13.75% p.a. If the retiree opts for a 15-year term of reverse mortgage, what fixed periodic monthly payments he stands to receive under the scheme? A. 13379 b. 10,703 c. 10826 d. 13532 30. A retiree of age 65 has fixed pension of Rs. 15,000 per month. His household expenses have exceeded his pension of late and are Rs. 16,000 per month now. He has approached an approved lending institution under Reverse Mortgage Scheme. He is offered fixed monthly payments for 15 years at a rate of interest of 13.75% on Rs. 64 lakh eligible value of his home. He meets his annual expenses as increased by 6% inflation every year and invests the excess amount from his two fixed annuities: fixed pension and reverse mortgage stream, in an investment yielding 10% p.a. at the end of every year starting from this year onwards. You assess at the end of five years thus accumulated fund against the total liability under Reverse Mortgage and find that _ (a) Rs. 3.34 lakh net liability due to Reverse Mortgage Loan (b) Rs. 3.10 lakh net liability due to Reverse Mortgage Loan (c) Rs. 3.51 lakh net liability due to Reverse Mortgage Loan (d) Rs. 66,097 net liability due to Reverse Mortgage Loan




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Investment Planning

How investment planning is different from selling investment products Investment Planning is the process of determining how to invest the current assets and future savings which depends on the current financial position, the risk appetite, the tax status and finally the ultimate goal of life. Investment planning is a subset of the Overall Financial Planning. Financial Advisor is like a Doctor & the Distributor of Financial Products is like a Chemist. It becomes necessary to differentiate between the approach of an Advisor and a Product Seller. Financial Advisor will first consider the financial position of the investor and calculate its risk profile. He will not only understand the finances of the investor but also the various financial products available in the market to compare as to which will be the best suiting to the client. This calls for a great fiduciary responsibility in the interest of the Investor and the compensation for the services is obtained in the form of fees from the investor. Investment Strategies

Investing strategies are like food diets: There is no "best investment strategy" except the one that works best for you. You don't need anything expensive or tailor-made; you need something comfortable that will last a long time, especially if your investment objective is long-term (10 years or more).

So before making a commitment to anything, whether it be food diets or investing strategies, see which works best for your personality and style. You can start by considering the top 7 investing strategies, some of which are theories, styles or tactics, which can help you to build a portfolio of Stocks & mutual funds.

1. Fundamental Analysis

We begin with fundamental analysis because it is one of the oldest and most basic forms of investing styles. Fundamental analysis is a form of an active investing strategy that involves analyzing financial statements for the purpose of selecting quality stocks. Data from the financial statements is used to compare with past and present data of the particular business or with other businesses within the industry. By analyzing the data, the investor may arrive at a reasonable valuation (price) of the particular company's stock and determine if the stock is a good purchase or not.

2. Value Investing

The value investor is looking for stocks selling at a "discount;" they want to find a bargain. Rather than spending the time to search for value stocks and analyze company financial statements, a mutual fund investor can buy index funds, Exchange Traded Funds (ETFs) or actively-managed funds that hold value stocks.


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3. Growth Investing

As the name implies, growth stocks typically perform best in the mature stages of a market cycle when the economy is growing at a healthy rate. The growth strategy reflects what corporations; consumers and investors are all doing simultaneously in healthy economies--gaining increasingly higher expectations of future growth and spending more money to do it.

A nuanced version of growth investing can be found in the momentum investing strategy, which is a strategy of capitalizing on current price trends with the expectation that momentum will continue to build in the same direction. Most commonly, and especially with mutual funds designed to capture the momentum investing strategy, the idea is to "buy high and sell higher." For example, a mutual fund manager may seek growth stocks that have shown trends for consistent appreciation in price with the expectation that the rising price trends will continue.

4. Technical Analysis

Technical analysis can be considered the opposite of fundamental analysis. Investors using technical analysis (technical traders) often use charts to recognize recent price patterns and current market trends for the purpose of predicting future patterns and trends. In different words, there are particular patterns and trends that can provide the technical trader certain cues or signals, called indicators, about future market movements. For example, some patterns are given descriptive names, such as "head and shoulders" or "cup and handle." When these patters begin to take shape and are recognized, the technical trader may make investment decisions based upon the expected result of the pattern or trend. Fundamental data, such as P/E ratio, is not considered in technical analysis where trends and patterns are prioritized over valuation measures.

5. Buy and Hold

Buy and hold investors believe "time in the market" is a more prudent investment style than "timing the market." The strategy is applied by buying investment securities and holding them for long periods of time because the investor believes that long-term returns can be reasonable despite the volatility characteristic of short-term periods. This strategy is in opposition to absolute market timing, which typically has an investor buying and selling over shorter periods with the intention of buying at low prices and selling at high prices.

The buy-and-hold investor will argue that holding for longer periods requires less frequent trading than other strategies. Therefore, trading costs are minimized, which will increase the overall net return of the investment portfolio. Portfolios employing the buy and hold strategy have been called lazy portfolios because of their low-maintenance, passive nature.

6. Core and Satellite


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Core and Satellite is a common and time-tested investment portfolio design that consists of a "core," such as a large-cap stock index mutual fund, which represents the largest portion of the portfolio, and other types of funds—the "satellite" funds—each consisting of smaller portions of the portfolio to create the whole. The primary objective of this portfolio design is to reduce risk through diversification (putting your eggs in different baskets) while outperforming (obtaining higher returns than) a standard benchmark for performance, such as the BSE500 Index. In summary, a Core and Satellite portfolio will hopefully achieve above-average returns with below-average risk for the investor.

Definition of 'Asset Allocation'

Financial assets vary in returns from each other depending on market conditions and user requirements. Almost all asset classes are not perfectly correlated with each other, so diversifying across multiple sectors tends to bring down the overall risk of a portfolio. Strategic Asset Allocation This involves allocating fixed weights to various asset classes over the entire investment horizon. The return of the portfolio is then simply the weighted average return of various asset classes. For example, if you invest 60 per cent of your investments in stocks which have 15 per cent returns and 40 per cent in bonds which offer 5 per cent returns, then the mean return of the portfolio is 11 per cent. Tactical Asset Allocation This strategy allows short term deviations from the ideal asset allocation to capitalize on market fluctuations or attractive investment opportunities that exist for a small period of time. The investor tends to remain moderately active and once the short-term profits have been achieved the portfolio is rebalanced to the original mix. Dynamic Asset Allocation This strategy is meant for active investors who monitor their portfolio on a regular basis. The investor tends to modify the allocation percentage of various assets depending upon the how the markets and the economy is fluctuating. User may shift the gains from a volatile asset to less risky assets when markets are correcting or may shift to riskier assets when the markets are booming. Rebalancing An effective long-term investment strategy focuses on asset allocation across products and asset classes keeping in mind the risk-return needs of an investor. This also helps counter market volatility. Over time with change in asset prices and asset returns, a portfolio’s asset allocation changes and gives rise to the need for rebalancing. Here are two basic ways through which you can rebalance.


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Periodic, time-based rebalancing For investors, who don’t actively track asset prices, it is best to adopt a periodic and systematic approach. You set the frequency for portfolio reviews and rebalance accordingly. You need not rebalance with every review unless one of two things happen—either the allocation for specific assets has deviated substantially say in excess of 10% or your original goals and requirements have changed and warrant a change in allocation. In this strategy, the rebalancing trigger can also be a fixed deviation, say 5% or 10%, from the original allocation consistently over a period of time. The frequency will depend on asset characteristics. So, if you have 80% equity in your portfolio, the review frequency is likely to be at shorter intervals. But if 80% of it is in fixed-return assets, it’s better to space the review cycles. Tactical rebalancing This works better for active investors, who keenly follow asset prices. Although the risk-return pattern of a portfolio is best viewed in line with the asset allocation, often absolute returns or risk can cloud judgment. For example, a sharp fall in equity markets for some (risk-taking investors) may create an opportunity to buy at cheap valuations and for others (risk-averse investors) the panic to sell. This happens despite knowing that the equity part is meant for long-term goals, which don’t change often, and that short-term volatility in equity gets evened out over time. This type of rebalancing relies more on the market environment and external dynamics that affect asset prices. Given that in the recent years, price volatility across asset classes has increased, there is some merit in adopting this strategy, but the risk involved is higher as the rebalancing is based on external events rather than your financial goals and risk appetite.




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Standard Deviation Standard deviation as a method of measuring the risk of securities calculates how far the returns on the security deviate from the mean returns provided by the security. Thus, the Variance (square of standard deviation) is an important factor which calculates the volatility of the returns on the securities. It’s important for investors to be able to quantify and measure risk. To calculate the total risk associated with the expected return, the variance or standard deviation is used. Standard deviation is a measure of the total risk of an asset or a portfolio, including both systematic and unsystematic risk. It captures the total variability in the assets or portfolios return, whatever the sources of that variability. A low Standard deviation may be attractive but not sufficient to make the Investment decision. As an Investor you need to know how security selected by you has performed in contrast to benchmark Index. Standard deviations for well- diversified portfolios are reasonably steady across time, and therefore historical calculations may be fairly reliable in projecting the future. Moving from well- diversified portfolios to individual securities, however, makes historical calculations less reliable. Fortunately, the number one rule of portfolio management is to diversify and hold a portfolio of securities, and the standard deviations of well-diversified portfolios may be more stable. As an example, the average return on an FMCG stock is say 10% however we observe during the period that the stocks not only over perform give 20% returns but also post negative returns. The degree of the deviation from the average of 10% is measured by standard deviation or Variance. How do we compute the standard deviation?

Period Return from FMCG Stock 1 15 2 12 3 20 4 -10 5 14 6 9

By using excel standard deviation is 10.4 And variance is square root of SD = 10.4^2 Portfolio Expected Return The expected return on a portfolio is simply the weighted average of the expected returns on the individual securities in the portfolio:




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Example: A portfolio consist for four securities A, B, C and D with expected returns of 12%,15%,18%,20% respectively. The proportion of portfolio value invested in these securities is 0.20, 0.30, 0.30 and 0.20 respectively. The expected return on portfolio is; 12%*0.20+15%*0.30+18%*0.30+20%*0.20 =16.3% Portfolio Standard deviation in a 2-security case Computation of standard deviation and variance from a single security we can calculate the standard deviation and variance of the entire portfolio. The expected portfolio return on a portfolio is the weighted average return of the Individual securities in the portfolio. Thus, the return on the portfolio can be easily arrived at. We have seen that diversification reduces the risk. In general, the lower the correlation of securities in a portfolio, the less risky the portfolio will be. True diversification is about choosing correct securities that are negatively correlated rather than mere increase in number of securities. Portfolio risk is not the weighted average of the risks of individual securities in the portfolio (except when the returns from securities are uncorrelated). The SD of portfolio consisting of two securities is calculating by below formula.

Where, σxy is the portfolio standard deviation wx = percentage of stock x in the total portfolio value wy = percentage of stock y in the total portfolio value σx2 = SD of stock x σy2 = SD of stock y COVxy = covariance of stock x and stock y COVxy = Coefficient of correlation * SD of X Security * SD of Y security Example: a portfolio consists of two securities X and Y, Weights for stock x and stock y are 0.6 and 0.4 respectively. Standard deviation of the return for stocks X and Y are 10 and 16 respectively. The coefficient of correlation between the returns on Securities X and Y is 0.5. What is the SD of portfolio? So portfolio SD will be: {(0.6)2*(10)2+ (0.4)2*(16)2+ [2*.06*.04*(0.5*10*16)} 1/2




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= (36+40+38.4)1/2

= 10.74 Covariance: Covariance reflects the degree to which the return of the two securities varies or changes together. A positive covariance means that return of two securities move in same direction whereas a negative covariance implies the returns of the two securities move in opposite direction. Coefficient of correlation: Covariance and correlation are conceptually analogous in the sense both reflect the degree of co-movement between two variables. Correlation coefficient is simply covariance divided by the product of Standard deviations. Beta Beta is the measure of the relation of return on a stock or a portfolio of investments with that of the Financial Market as a whole. This implies that Beta measures the risk that how far the stock will face the risk in the market system and thus it is called as the measure of systematic risk. Beta is a measure of the systematic risk of a security that cannot be avoided through diversification. Beta measures non-diversifiable risk. Beta shows the price of an individual stock which performs with changes in the market. In effect, the more responsive the price of a stock to the changes in the market, the higher is its Beta. Betas can be negative or positive. But generally, betas have been found to be positive which means that the direction of the movement of individual stock generally tends to be in line with the market: falling when the market is falling and rising when the market is rising. –An asset with a Beta of 0 means that there is no relation of the asset with the Financial Market. Whereas an Index Fund which covers the stocks in same proportion as of that with the Index will be said to have a Beta of 1 with the respective market index. Beta = Covariance (Market return & Stock return)/Variance of Market In simplified terms Beta = (Risk of Security/risk of Market)*Coefficient of correlation between market & Security Example: Beta of stock A is 1.5 while that of stock B is 1. If the market is expected to rise then an aggressive investor would buy: a. Either A or B; because in a rising market all stocks will rise b. Stock A because it may deliver superior returns compared to B c. Stock B because the risk will be less compared to A while the returns would be the same d. Stock B because it may deliver superior returns compared to A




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Risk-adjusted Returns Recognizing the necessity to incorporate return and risk into the analysis of portfolio return, three researchers - William Sharpe, Jack Treynor, and Michael Jensen developed measures of portfolio performance in the 1960s. These measures are often referred to as the composite (risk-adjusted) measures of portfolio performance, meaning that they incorporate both realized return and risk into the evaluation. These measures are still used by mutual funds and money managers. Sharpe Ratio When total risk is adjusted and returns are projected, it is called Sharpe ratio. It measures the excess return per unit of total risk (as measured by standard deviation). Also known as Reward to variability ratio. The higher the Sharpe ratio better is the performance. This ratio measures the effectiveness of a fund manager in diversifying the total risk i.e. standard deviation.

Market data: Risk Free Return = 5% Portfolio Data: Portfolio Return = 12% Beta = 1.2 Portfolio Std. Dev = 14 %

=

(0.12 - .05)/.14 = .50

Sharpe Measure

Sharpe Ratio

Total portfolio return - Risk-free rate Portfolio standard deviation =




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Treynor Measure Beta is the measure of market risk of the portfolio. Higher values indicate superior performance

Information ratio – To evaluate Mutual Funds The information ratio measures the risk-adjusted returns of a financial asset or portfolio relative to a certain benchmark. This ratio aims to show excess returns relative to the benchmark, as well as the consistency in generating the excess returns. The consistency of generating excess returns is measured by the tracking error. The selection of the benchmark is subjective. The most commonly used benchmarks are the yields of government-issued bonds (e.g., G Sec yield) or a major equity index (e.g., Nifty 50). Uses of the Information Ratio

The information ratio is primarily used as a performance measure by fund managers. In addition, it is frequently used to compare the skills and abilities of fund managers with similar investment strategies. The ratio provides investors with insights about the ability of a fund manager to sustain the generation of excess, or even abnormal (as in “abnormally high”), returns over time. Finally, some hedge funds and mutual funds use the information ratio to calculate the fees that they charge their clients (e.g., performance fee).

The information ratio and the Sharpe ratio are similar. Both ratios determine the risk-adjusted returns of a security or portfolio. However, the information ratio measures the risk-adjusted returns relative to a certain benchmark while the Sharpe ratio compares the risk-adjusted returns to the risk-free rate.

Treynor Ratio Total portfolio return - Risk-free rate Portfolio Beta

=

Market data: Risk Free Return = 6% Portfolio Data: Portfolio Return = 10% Beta = 0.9

= = 0.044 (.10 - .06) 0 9

Treynor Measure

Measures excess return per unit of SYSTEMATIC RISK Also known as "excess return to volatility" ratio


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Jensen’s Index Michael Jensen’s measure of portfolio performance was differential return measure (Alpha). It calculated the difference between what the portfolio actually earned and what it was expected to earn given its level of systematic risk. Basically, it attempts to measure the constant return that the portfolio manager earned above, or below, the return of an unmanaged portfolio with the same market risk. Jensen’s measure is an absolute measure of performance. Alpha is widely used to evaluate mutual fund and portfolio manager’s performance

Example: Compute the Jenson’s alpha when the stock when the risk-free return is 8% and the expected return from the market is 12% for a stock with Beta of 1.2 and actual return of portfolio is 16% Jenson’s Alpha= Actual Portfolio return - (Risk free return+ (beta*(Market return – Risk free rate))) Jenson’s Alpha =16 - (8%+ (1.2(12-8)) Jenson’s Alpha = 3.2

R – Squared The R-squared figure demonstrates how much of a fund's movements can be explained by the movements in its benchmark index. The higher the R-squared figure, the more closely the fund's performance can be explained by its index, whereas a fund with a lower R-squared doesn't behave much like its index. And the higher the R-squared, the more relevant the beta figure. R-squareds can range from zero, meaning there's no degree of performance correlation between a market benchmark and a given investment, to 100, meaning that an investment is highly correlated with an index. Not surprisingly, index-tracking funds will have an R-squared figure of exactly 100 or very close to it, while a fund whose movements diverge widely from its index will have a very low R-squared figure. For example, A Mutual Fund has a three-year R-squared of just 61.97 with its index, indicating a very low correlation with that index.

Indicator of Portfolio Manager’s performance. Higher the Alpha indicate the ability of fund managers to generate

excess returns than the expected market return

CAPM Required Return

Alpha = Actual Rate of Return - Rate of Return predicted by CAPM

Jensen’s Alpha = Portfolio Return – [Risk free return + (Market Return – Risk free Return) * Beta]




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Capital Asset Pricing Model

The Capital Asset Pricing Model (CAPM) is a model that describes the relationship between the expected return and risk of investing in a security. It shows that the expected return on a security is equal to the risk-free return plus a risk premium, which is based on the beta of that security. Below is an illustration of the CAPM concept.

The CAPM formula is used for calculating the expected returns of an asset. It is based on the idea of systematic risk (otherwise known as or non-diversifiable risk) and that investors need to be compensated for it in the form of a risk premium. A risk premium is a rate of return greater than the risk-free rate. When investing, investors desire a higher risk premium when taking on more risky investments. Expected return on security= Risk free return+ (beta*(Market return – Risk free rate))


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Why CAPM is Important

The CAPM formula is widely used in the finance industry. It is vital in calculating the weighted average cost of capital (WACC) as CAPM computes the cost of equity.

WACC is used extensively in financial modeling. It can be used to find the net present value (NPV) of the future cash flows of an investment and to further calculate its enterprise value and finally its equity value.

Example: Compute the expected return for the stock when the risk-free return is 8% and the expected return from the market is 12% for a stock with Beta of 1.2. Expected return of security/portfolio= Risk free return+ (beta*(Market return – Risk free rate)) Expected return of security/portfolio=8%+ (1.2(12-8) =12.8


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Efficient Frontier

The efficient frontier is the set of optimal portfolios that offer the highest expected return for a defined level of risk or the lowest risk for a given level of expected return. Portfolios that lie below the efficient frontier are sub-optimal because they do not provide enough return for the level of risk. Portfolios that cluster to the right of the efficient frontier are sub-optimal because they have a higher level of risk for the defined rate of return.

Efficient frontier comprises investment portfolios that offer the highest expected return for a specific level of risk.

Returns are dependent on the investment combinations that make up the portfolio. The standard deviation of a security is synonymous with risk. Lower covariance between portfolio

securities results in lower portfolio standard deviation. Successful optimization of the return versus risk paradigm should place a portfolio along the

efficient frontier line. Optimal portfolios that comprise the efficient frontier tend to have a higher degree of

diversification. Optimal Portfolio

One assumption in investing is that a higher degree of risk means a higher potential return. Conversely, investors who take on a low degree of risk have a low potential return. According to Markowitz's theory, there is an optimal portfolio that could be designed with a perfect balance between risk and return. The optimal portfolio does not simply include securities with the highest potential returns or low-risk securities. The optimal portfolio aims to balance securities with the greatest potential returns with an acceptable degree of risk or securities with the lowest degree of risk for a given level of potential return. The points on the plot of risk versus expected returns where optimal portfolios lie are known as the efficient frontier.

Selecting Investments

Assume a risk-seeking investor uses the efficient frontier to select investments. The investor would select securities that lie on the right end of the efficient frontier. The right end of the efficient frontier includes securities that are expected to have a high degree of risk coupled with high potential returns, which is suitable for highly risk-tolerant investors. Conversely, securities that lie on the left end of the efficient frontier would be suitable for risk-averse investors.

Enterprise Value Enterprise Value (EV) is the measure of a company’s total value. It looks at the entire market value rather than just the equity value, so all ownership interests and asset claims from both debt and equity are included. EV can be thought of as the effective cost of buying a company or the theoretical price of a target company (before a takeover premium is considered).


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The simple formula for enterprise value is:

EV = Market Capitalization + Market Value of Debt – Cash and Equivalents

The extended formula is:

EV = Common Shares + Preferred Shares + Market Value of Debt + Minority Interest – Cash and Equivalents

Why is Enterprise Value used?

Enterprise Value is often used for multiples such as EV/EBITDA, EV/EBIT, EV/FCF, or EV/Sales for comparable analysis such as trading comps. Other formulas, such as the P/E ratio, usually don’t take cash and debt into account like EV does. Hence, two identical companies that have the same market cap may have two different enterprise values.

For instance, Company A has $60 million in market cap, $20 million in cash, and carries no debt. Company B, on the other hand, also has $60 million in market cap, but has no cash, and carries $30 million of debt. In this simple scenario, we can see that Company A is cheaper to buy because it doesn’t have any debt to pay off creditors.

Enterprise Value is very useful in Mergers and Acquisition situations, especially with controlling ownership interests. In addition, it is useful for comparing companies with different capital structures because a change in capital structure will not affect the amount of enterprise value.

Weighted Average Cost of Capital A firm’s Weighted Average Cost of Capital (WACC) represents its blended cost of capital across all sources, including common shares, preferred shares, and debt. The cost of each type of capital is weighted by its percentage of total capital and they are added together.


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Valuation of Bonds In respect of longer-term securities, the time between receipts of interest income becomes a significant factor in its valuation. In respect of dated securities and bonds interest payments are made at specified intervals. The amount of interest and the timing of these payments will affect the price of a longer-term security. What determines the price of a bond?

Current Yield - The Coupon rate divided by the purchase price. Yield to maturity - The YTM is equal to IRR which is calculated by outflow (purchase price of Bond) & all cash flow receivable from owning the bond including maturity. Yield to call: Some bonds carry features that entitle the issuer to call (buy back) the bond prior to the stated maturity date. Yield to call is calculated in the same way like YTM but the tenure and maturity value is changed. Yield to Put: Some bonds carry features that entitle the bond holder to ask from issuer for buy back the bond prior to the stated maturity date. Yield to put is calculated in the same way like YTM but the tenure and maturity value is changed. Modified Duration : Modified duration, a formula commonly used in bond valuations, expresses the change in the value of a security due to a change in interest rates. In other words, it illustrates the effect of a 100-basis point (1%) change in interest rates on the price of a bond.

Modified duration illustrates the concept that bond prices and interest rates move in opposite directions – higher interest rates lower bond prices, and lower interest rates raise bond prices. A bond with a higher Modified duration will be more sensitive to changes in interest rates.

Yield to Maturity

What is the rate of return if the bond is held until the maturity date?

Coupon rate What amount will the investor receive as interest payment?

Maturity Amount

What amount of money a holder will receive back once a bond matures?

Maturity date On what future day will be the investor's principal repaid?


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Weighted Average Maturity :

This is more commonly referred to as the average maturity of a debt fund. It is the average time it takes for securities in the portfolio to mature, weighted in proportion to the amount invested.

E.g.: Rs 1,000 invested in Bond A matures in 5 years Rs 2,000 invested in Bond B matures in 10 years

Total investment in debt portfolio = Rs 3,000 WAM = (1000/3000)*5 + (2000/3000)*10 = 8.33 years

Average maturity indicates the sensitivity of the portfolio to interest rate changes. The higher the average maturity, the greater is the volatility of returns in the fund. This is seen in debt funds with longer investment horizons. On the other hand, average maturities in liquid funds have been restricted to 90 days while ultrashort funds could go higher but are usually less than a year, making them less volatile to interest rate movements. The average maturity of a scheme gives you a broad guideline in terms of finding a debt fund suitable for the time horizon of your investment. Valuation of real estate

It is important to have a clear idea of valuation of a property both at the time of purchase as well as at the time of sale. The parameters of valuation are complex and the valuations are many times highly subjective. The price for a property is arrived at mutually by the buyer and the seller while the value could be different. They tend to be very close to each other if both the buyer and seller are making informed decisions. 1. Capitalization approach

It is important to find out based on a market research what kind of yields are obtainable on comparable properties. Secondly it is required to work out the net income derived from the property by deducting expenses like repairs, insurance, etc. from the gross income and finally capitalize the net income for the market yield on the property. Value of Property = Net Operating Income/Yield Example Let’s presume that rent fetched is generally around 8.5% of property values. If rental income of say Rs. 20,000/- p.m. is earned on a property and expenses to the tune of say Rs. 20,000/- are incurred every year on insurance, repairs, etc. then the net annual rental income from the property would amount to 12*20000 -20000 = 220000/-




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Capitalizing net income of Rs. 2,20,000/- for a yield of 8.5% as follows, we get the capital value of the property: 2,20,000/0.085 = Rs. 25,88,235/- 2. Discounted cash flow method

If the proposed property earning regular income on a year on year basis, we have to work out the present value of cash flows using our standard formula used in annuity calculations. Value of the property is the present values of all cash flows to be received by owning the property as well as expected cash flow on sale of the property after a definite period of time. If we have an idea of expected price at which the property will be sold after a few years and the quantum of rental income on a yearly basis and idea of required rate of return on this investment then, the property can be valued in present terms. Example An investor wants to purchase a property which will fetch him a net rental income of Rs. 25,000/- p.a. steadily for the next 3 years at the end of which he will be able to sell the property for Rs. 3 Lakh. If the investor wants a return of 12% p.a. what price he should pay for the property? PV = [25000/(1.12)] +[ 25000/(1.12)2]+ [(25000+300000)/(1.12)3] = 22321.42 +(25000/1.2544)+(325000/1.405) =22321.42 +19929.84 + 231316.72 = 273356.98 say Rs. 2,73,400/- Better to calculate by excel




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Valuation of Equity shares – Dividend discount model Dividend discount model, conceptually a very sound and appealing model, the value of an equity share is equal to the present value of dividend expected from its ownership plus the sale price expected when the equity share is sold. Investors would like to buy “under-valued” stocks and sell ‘over-valued’ stocks held by them. Single period valuation model Let us begin with the case where the investor expects to hold the equity share for one year. The price of the equity share will be;

Where, P0 = current price of the equity share D1 = dividend expected a year hence P1 = price of the share expected a year hence r = rate of the return required on the equity share The underlying assumptions are the dividend of D1 will be paid at the end of the year and the share can be sold after one year at a price P1 Example If an investor expects to receive a dividend of 2.50 per share and year end price to be Rs. 150 and needs a return of 15% p.a. on his share investment at what price should he buy this share?

Multi period valuation model We have considered for a single period of one year; we can extend the same to multi periods where the present value of each year’s dividend will be discounted at the required rate of return and so will be the sale price at the end of the period. Stock prices and dividends have a tendency to grow over a period of time; we can factor in these growth rates in our calculation of share value:




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Constant growth model (Gordon Model) In Gordon Model, we assume the dividend per share grows at constant rate. The value of a share under this assumption is Current price of equity share = D1/r-g D1 = dividend expected a year hence r = rate of the return required on the equity share g = growth rate Example -1 The dividend paid out by a company has been growing at the rate of 10% p.a. over the last few years. The next year’s dividend is expected to be Rs. 2/- per share. The expected return is 16%. At what price should we buy the stock?

Example - 2 If a company has been currently paying dividend at the rate of Rs. 2/- per share and if the growth rate is 10% and expected return is 15% what should be present price of the share?

Two Stage growth Model The simple extension of constant growth model assumes that the extraordinary growth (good or bad) will continue foe a finite number of years and thereafter the normal growth will prevail indefinitely. Example: The current dividend on the equity share of Pasco ltd. is Rs. 2.00. Pasco is expected to enjoy an above normal growth rate of 20%in dividends for a period of 6 years. Thereafter the growth rate will fall and stabilize at 10%. Equity Investors require a return of 15%. What is the intrinsic value of equity share of Pasco? Ans: Rs. 70.76




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Derivatives: Futures Futures contracts are organised/ standardised contracts, to buy or sell a specified quantity of financial instrument /commodity at a designated future date at a price agreed upon by the buyer and seller. Features – These contracts are traded on the exchanges. These contracts, being standardised and traded on the exchanges are very liquid in nature. In futures market, clearing corporation/ house provides the settlement guarantee. Mark-to-market.

Mark-to market means that the broker is tracking your position every day. Every loss on daily closing is debited to your account, even though you are not closing your position.

Derivatives: Options Option are deferred delivery contracts that give the buyers the right, but not the obligation, to buy or sell a specified underlying at a set price on or before a specified date. Deferred Delivery Contracts Give the buyer a right Not the obligation To buy or Sell A specified underlying At a set price On or Before a specified date

Types of Options Call Option: A call gives holder the right to BUY an asset at a certain price within a specific period of

time. Calls are similar to having a long position on a stock where the buyers are bullish on the asset. Put Option: A put gives the holder right to SELL an asset at a certain price within a specific period of

time. Puts are similar to having a short position on a stock where the buyer is bearish on the asset.




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Investment Planning Questions

1. An investment analyst has told Akshay to invest in a portfolio after evaluating on the following parameters -

(1) The performance of portfolio adjusted by the return of risk-free assets over the risk of portfolio (2) Measure of the volatility in a portfolio as compared to the entire market (index) as a whole (3) Measure of how many individual elements tend to deviate from the average (4) Measure excess return on an investment over the benchmark with same degree of risk (5) The proportion of variability in a portfolio compare to benchmark

The analyst also used a lot of terminology which confused Akshay. He wants to know how the terminology used fits into these evaluation parameters. You advise the terminology, respectively, as_______.

a) Beta, Sharpe Ratio, Standard Deviation, Alpha, R2. b) Sharpe Ratio, Beta, Standard Deviation, Alpha, R2. c) Alpha, R2, Standard Deviation, Sharpe Ratio, Beta. d) R2, Sharpe Ratio, Standard Deviation, Alpha, Beta

2) Aamir wants to know whether his Mutual Fund portfolio's returns are due to smart investment decisions by the fund manager or a result of excess risk. As he is of the opinion that one portfolio or fund can reap higher returns than its peers, it is only a good investment if those higher returns do not come with too much additional risk. He wants his Mutual Fund to give him better risk-adjusted performance. You would suggest him to look for ________ Ratio.

a) Alpha b) Sharpe c) Beta d) R-Squared

3) You have suggested Aamir to look for few important risk measures which measure different types of risks. When comparing two or more potential investments, an investor should always compare such measures. These are ________.

a) CAPM, Treynor Ratio, Beta, Standard Deviation and the Sharpe Ratio b) Alpha, Beta, R-squared, Standard Deviation and the Sharpe Ratio c) Quick Ratio, Alpha, Beta, Sharpe Ratio and Retention Ratio d) Debt/Equity Ratio, Current Ratio, Sharpe Ratio, Alpha and Standard Deviation

4) While explaining the basics of selecting a Mutual Fund scheme you have asked Shahrukh to analyze the Mutual Fund Portfolio by five main indicators that apply, one of these is __________ which is a measure of the volatility, or systematic risk, of a security or a portfolio in comparison to the market as a whole.




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a) R-Squared b) Alpha c) Beta d) Sharpe Ratio

5) Shahrukh is planning to invest in two companies’ ABC and XYZ. The coefficient of correlation between the two stocks ABC and XYZ is 0.7. The standard deviation of returns for ABC is 18% and the standard deviation of returns for XYZ is 22. The expected return for XYZ is 18 and the expected return for ABC is 15%. Calculate the expected returns and standard deviation of Shahrukh’s portfolio for which he plans to invest Rs. 4 lakh in XYZ Company and Rs. 2 lakh in ABC Company.

a) 16.33% and 18.83 b) 17.00% and 19.34 c) 19.01% and 20.77 d) 16.95% and 19.38

6) Aishwraya wants to assess the volatility of the stock XYZ Ltd in the market. You measure the same

relative to the Nifty Index. You have found out the relevant parameters of the stock XYZ Ltd and Nifty Index as follows:

i) Standard Deviation of XYZ Ltd: 2.2 ii) Standard Deviation of Nifty Index: 1.90 iii) Correlation Co-efficient of XYZ Ltd with Nifty Index: 0.90 You find the volatility of stock XYZ Ltd. relative to Nifty Index to be

a) 4.62 b) 1.04 c) 0.78 d) 1.29

7) Veeru’s Mutual Fund investments consist of four different funds. Performances of these funds are as follows:

Mutual Fund

Fund Return of 5 years Beta

A 18% p.a. 1.25 B 14% p.a. 0.85 C 16% p.a. 1.02 D 17% p.a. 1.20 How would you rank these funds from the best to worst on the basis of Jensen's Alpha? (Assume risk free

rate is 4% and return from market is 15%)

a) A, D, C & B b) A, B, C & D




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c) C, B, A & D d) D, A, B & C

8. Salman’s Mutual Fund investments consist of four different funds. Performance of these funds is as follows:

Mutual Fund Fund Return of 1 year Standard deviation

A 15.33% 42.76 B 12.54% 37.15 C 10.25% 23.78 D 9.06% 15.26

He wants to know whether the return on these mutual funds is due to smart investment decisions as a result of excess risk. How would you rank these funds from the best to worst on the basis of Sharpe ratio? (Assume risk free Rate is 6%)

a) B,C,D,A b) A,C,D,B c) A,D,C,B d) B,D,C,A

9. You are evaluating the rankings based on Jenson’s Alpha of three funds A, B and C . The average returns obtained from funds A, B and C have been 16%, 19% and 14%, respectively against the market return of 13%. The standard deviations of fund returns have been 17, 22 and 16, respectively versus the market return standard deviation of 15. If the beta reported of these funds is 1.2, 1.4 and 1.1, respectively and the risk-free rate of return is 5.5%, what are your rankings in the order of best to worst?

(a) B,A,C (b) A,B,C (c) C,B,A (d) A,C,B

10. You are evaluating the rankings based on the basis of Sharpe ratio of three funds A, B and C . The average returns obtained from funds A, B and C have been 16%, 19% and 14%, respectively against the market return of 13%. The standard deviations of fund returns have been 17, 22 and 16, respectively versus the market return standard deviation of 15. If the beta reported of these funds is 1.2, 1.4 and 1.1, respectively and the risk-free rate of return is 5.5%, what are your rankings in the order of best to worst? (a) B,A,C (b) A,B,C (c) C,B,A (d) A,C,B

11. On 10th March 2008 Aamir had taken an open short position of 10 lots of Nifty futures, with an average

price of Rs. 4,450. On 10th March 2008, Nifty closed at Rs. 4,520. However, he did not square off his position until 11 March 2008 when Nifty dipped to an intraday low of Rs. 4,395. He squared off his position of 4 lots at Rs. 4,495 & remaining 6 lots on an average price of Rs. 4,410. On 11th March 2008,




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Nifty closed at Rs. 4,460. The lot size of a Nifty future is 50. What profit or loss was booked by Aamir on his entire position? (Assume Brokerage and taxes per lot is Rs. 50 on each side, while buying as well as selling)

a) Profit of Rs. 2,000 b) Loss of Rs. 2,000 c) Profit of Rs. 3,000 d) Loss of Rs. 4,000

12. Aamir is considering a proposal for investment in commercial real estate property to earn rental income.

The following data is available for the property selected by him:

Asking price : Rs. 21,00,000 Annual rental income : Rs. 1,60,000 Insurance expenses : Rs. 5,500 Annual Maintenance : Rs. 10,000 Market yield : 4%

What according to you is the value of property as per capitalization approach? a) Rs. 37,50,000 b) Rs. 36.12.500 c) Rs. 38,40,000

13. Ashwin currently aged 45 years acquired bonds face value each bond Rs. 1000 today with a coupon of 8% with 5 years remaining until maturity (Interest is paid semiannually). He acquired the bond for Rs. 1080. Ashwin want to know from you, yield to maturity (annual effective yield) on this investment?

a) 6.12% b) 6.40% c) 6.25% d) 6.21%

14. Shahrukh invests in 20-year maturity, 12% coupon bond (Face value Rs. 1000) paying coupons semi-annually is callable after ten years at a call price of Rs. 1,050. The bond traded in market at a Yield to Maturity of 10.5% immediately after five years from the issue date. He invests next day of coupon payment at YTM of 10.5% . The yield to call of this bond is

a) 9.61% b) 5.25% c) 4.81% d) 4.19%




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15. Today is 16th Jan 2011; Meghna has invested in 500 Zero coupon bonds of face value of Rs. 1,000 each & 5 year term, maturing on 15/01/2013.Bonds were issued at Rs. 670 per bond. The bonds also have an option that after 3-year investor can ask for repayment and company shall refund Rs. 840 on each bond. Meghna wants to know the yield if he asks for repayment after three years.

a) Yield to call is 8.34% p.a. b) Yield to put is 7.83% p.a. c) Yield to put is 8.34% p.a. d) Yield to call is 7.83% p.a.

16. Sham purchased Zero coupon bonds at Rs. 8500 per bond, A maturity value of Rs. 2 Lakh per bond was offered after the term of 25 years. The bond has an inbuilt option that 5 year the investor can ask for repayment and company shall refund Rs. 12,600 on each bond while after 10 years the company can buy back the bond after paying Rs. 19400 on each bond to the investor. Sham wants to know rate of return in both the cases:

a) Yield to call is 8.19% p.a. while yield to Put is 8.60% p.a. b) Yield to Put is 8.19% p.a. while yield to call is 8.60% p.a. c) Yield to call is 8.60% p.a. while yield to put is 13.47% p.a. d) Yield to put is 8.60 % p.a. while yield to call is 13.47% p.a.

17.

Situation: Bond valuation and return

Face value of the Bond

1,000 Rs. Coupon Rate (coupon payable at the end of every year on 31-December) 9% p.a. Date of maturity 31-Dec-19

Current market price (as on 1-Apr-2015)

1,078 Rs. What would be the effective return if an investment is made in the bond today and held till maturity?

a) 7.09% b) 7.54% c) 8.17%

18. Salman wants to invest in equity shares of PQR Ltd. The company PQR Ltd. has paid a dividend of Rs. 12.00 per share in current year. The dividend is expected to grow @11% p.a. for the next 3 years and thereafter it is expected to grow @8% p.a. forever. He wants to know the intrinsic value of share today as per dividend discount model, his required rate of return on PQR Ltd.’s equity is 15% p.a.?




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a) Rs. 200 b) Rs. 178 c) Rs. 211 d) Rs. 252

19. Reliable Ltd. ‘s dividends have been growing at a rate of 18% per annum. The growth stock is expected to continue for 4 years. After that the growth rate will fall to 12% for the next four years. Thereafter the growth rate is expected to be 6% forever. If the last dividend per share was Rs. 2.00 and investor required rate of return on equity is 15% p.a. Calculate what is the intrinsic value per share?

a) 40.32 b) 88.60 c) 71.84 d) 42.80

20. A stock of face value Rs. 10 is currently priced at Rs. 175. The company paid a dividend of 125% in the previous fiscal year and the absolute amount of dividend is expected to grow by on an average 5 % year-on-year. It has a beta of 0.8 . You expect the market to give a return of 12% while the risk-free rate is 5%. You find out the extent of undervaluation or overvaluation of the stock by dividend discount method, and state that ______.

(a) the company’s stock is undervalued by 38% (b) the company’s stock is overvalued by 56% (c) the company’s stock is undervalued by 153% (d) the company’s stock is undervalued by 25%

21. Rajesh wants to understand the extent of correlation between the Gold prices internationally and the gold prices in India. You opine the foreign exchange fluctuations play a major role here. Interestingly, the rise in gold prices internationally is accompanied by a dollar weakness, thereby smoothening out to a large extent Rupee price appreciation in gold. Currently, the price of gold per troy ounce is US $ 1113. Currently exchange rate is 1US $ = INR 46.22. She presumes a scenario where the price of gold after 6 months is US $ = 1250 per troy ounce. But US $ deprecates against Rupees to I US $ = INR =44.00. She wants to know percentage appreciation happen in gold in Rupees prices as per above situation. (Assume no other factor affect Gold prices) (1 troy ounce = 31.1035 gram)

a) 7.17% b) 6.91% c) 7.51%

22. You manage a Rs. 10,00,000 portfolio. You are expecting to receive an additional Rs. 6,50,000 from a new client. The existing portfolio has a required return of 10.25 percent. The risk-free rate is 5 percent and the return on the market is 9.5 percent. If you want required return on the new portfolio to be 11 percent, what should be the average beta for the new stocks added to the portfolio? (a) 1.25 (b) 1.59 (c) 1.76 (d) 1.47




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Income Tax Planning as per AY 2020-21 Taxes have inherently been a complex and confusing subject. This being the case the common man doesn’t even try to understand the nitty-gritty of this baffling subject but prefers to outsource their tax matters to their advisors or chartered accountants. Hence, this subject assumes paramount importance in the service offerings of every investment advisor. Income tax, Heads of Income and other Rules Taxes basically represent the sum of money charged by the Government at the prescribed rates in lieu of the various services provided. Taxes form the basic source of revenue to the Government. There are mainly two types of Taxes, direct tax and indirect tax as depicted below: Direct Taxes are those which are directly collected from the Tax payers i.e. the impact and incidence of direct Taxes fall on the same person Example: Direct Tax, Wealth tax & Professional Tax. On the other hand, the impact and incidence of indirect Taxes fall on different persons since the Tax payer recovers the indirect Taxes paid from their consumers/ buyers/ clients, as the case may be. Example of Indirect tax is GST & Custom duties

Tax Planning

‘Tax Planning’ is essentially a legal recourse for minimizing one’s Tax liability. It can be defined as a systematic exercise undertaken within the scope of law to minimize one’s Tax liability with the optimum use of available exemptions, deductions, reliefs and allowances. Since Tax planning is within the framework of the legal provisions, a Tax payer is legitimately entitled to arrange his affairs in a manner so as to reduce his Tax liability to the minimum. Further, this position has been time and again upheld by the Courts through various judicial precedents. However, it is pertinent to note that under the pretext of Tax planning, a Tax payer cannot indulge in ‘Tax avoidance’ or ‘Tax evasion’ as the line between the two is extremely fine. While the result of both is same (i.e. minimizing Tax outgo) in case of Tax evasion or Tax avoidance the transactions are arranged in a manner so as to circumvent the provisions of law with the mala fide intention of not paying Taxes. Tax evasion or Tax avoidance means illegally avoiding paying Taxes through fraudulent techniques to circumvent the Tax laws – wilful under reporting of income or inaccurate claim of deduction would be an example of Tax evasion. Such Tax evasion measures are not permissible by law and invite penal consequences. Thus, advisors need to be cautious at the time of devising Tax planning measures for their clients. While necessary strategies need to be undertaken to ensure that the client does not miss out on any legitimate claim, simultaneously precaution should be observed so that the planning measures are not construed as Tax evasion or Tax avoidance.




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BASIC CONCEPTS

The basic chargeability of Income-tax can be understood as: Any person whose total income for the previous year exceeds the basic amount not chargeable to tax is an Assessee and is liable to tax at the rates of Income-tax in force for the Assessment Year. The scope of total income is determined on the basis of the person’s residential status.

Person [Section 2(31) Under the Income Tax Act (ITA), a person is understood as a unit liable to pay taxes and includes the following:

i. an individual, ii. a Hindu undivided family, iii. a company, iv. a firm, v. an association of persons or a body of individuals, whether incorporated or not, vi. a local authority, and vii. every artificial juridical person, not falling within any of the preceding sub-clauses. Income [Section 2(24)] Income-tax is levied as a charge on income, so it is equally important to first understand the meaning of income as defined under the Income Tax Act, 1961 (the Act). Here it is of utmost importance to understand the difference between ‘receipt of money’ and ‘income’. All moneys received by an individual may not be income but every income received is definitely a receipt of money. Income has been inclusively defined under section 2(24) of the Act to mean and include the following among others: i. Profits and gains; ii. Dividends; iii. Value of any perquisites or benefits received by an employee; iv. Value of any perquisites or benefits received from any business or profession; v. Capital gains; vi. Prize money from lotteries, crossword puzzles, card games, TV shows, races including horse races, etc. Income may be in cash or kind, and illegal income is also taxable. Income earned by a person should be real, in other words, a person cannot make profit out of its own self by transferring money from one bank account to another. All income earned by a person need not be taxable. Therefore, if a receipt of money qualifies as income, the next step is to ascertain whether the income is taxable or not. Previous Year [Section 3] Previous year has been defined to mean the financial year immediately preceding the Assessment year. The previous year can also be understood as the year in which the income is earned by a person. For instance, the period from April 1, 2019 to March 31, 2020 will be referred to as the previous year. All the income earned during this period shall be clubbed at the end of the year and offered to tax as income for the assessment year 2020-21.




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Gross Total Income The Gross Total Income of an individual consists of the income under all the various heads. After arriving at the gross total income, adjustments are made for set-off and carry forward provisions as applicable. Section VI-A, of the Income Tax Act, specifies the deductions allowed from the total income of an individual. These deductions are provided under sections 80C to 80U of the Income Tax Act. Such deductions are allowed only against specific expenditures and payments made during the financial year. Deductions allowable under the Income Tax Act cannot exceed the total income of the individual. Rates of Taxation After arriving at the net income liable to tax and after taking into account all deductions allowable, one needs to apply the respective tax rate to arrive at the income tax payable. Rates of taxation are different for different types of assesses and are declared each year in the Finance Bill which is further approved and passed as the Finance Act. Income tax rates are structured slab wise, based on lower tax for lower income and higher rate of tax for highest of income. Rates applicable to Assessment Year 2020-21 are as follows: a. Individuals below 60 years of age

Income Slabs Income Tax rates Where taxable income does not exceed Rs.250000

Nil

Where taxable income exceeds Rs.250000 but does not exceed Rs.500000

5% of the amount by which the income exceeds Rs. 250000


Rs. 12500 + 20% of the amount by which the income exceeds Rs.500000

Where taxable income exceeds Rs.1000000 Rs.112500 + 30% of the amount by which the income exceeds Rs.1000000

b. Individuals 60 years and above but below 80 years of age


Nil


5% of the amount by which the income exceeds Rs. 300000


Rs. 10000 + 20% of the amount by which the income exceeds Rs.500000

Where taxable income exceeds Rs.1000000 Rs.110000 + 30% of the amount by




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which the income exceeds Rs.1000000 c. Individuals above 80 years of age


Nil


20% of the amount by which the income exceeds Rs.500000

Where taxable income exceeds Rs.1000000 Rs.100000 + 30% of the amount by which the income exceeds Rs.1000000

Surcharge The amount of Income tax shall be increased by a surcharge for the purposes of Union calculated at following rates

Income Slabs Surcharge rates Where the total income exceeds Rs. 50 L but does not exceed Rs. 1 Cr

10% of such Income tax

Where the total income exceeds Rs. 1 Cr but does not exceed Rs. 2 Cr


Where the total income exceeds Rs. 2 Cr but does not exceed Rs. 5 Cr


Where the total income exceeds Rs. 5 Cr 37% of such Income tax Health and Education cess on Income tax at the rate of 4 % of income tax ( inclusive of surcharge if applicable) Rebate u/s 87 A You can claim tax rebate under this provision if you meet the following conditions:

1. You must be a RESIDENT INDIVIDUAL; and 2. Your Total Income after Deductions (under Section 80) doesn’t exceed Rs 5 lakh. 3. The rebate is limited to Rs 12,500. This means that if the total tax payable is lower than Rs 12,500,

then that amount will be the rebate under section 87A. This rebate is applied to the total tax before adding the Education Cess (4%)




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Tax Slab Rate for Domestic Company:

(a) if the total turnover or gross receipts from the Previous year 2017-18 does not exceed Rs. 400 CR then 25% (b) In all other cases – 30% Plus: Surcharge: 7% of tax where total income exceeds Rs. 1 crore

12% of tax where total income exceeds Rs. 10 crore

Health & Education cess: 4% of tax plus surcharge

Tax Rate for Partnership Firm:

A partnership firm (including LLP) is taxable at 30%.

Plus: Surcharge: 12% of tax where total income exceeds Rs. 1 crore

Education cess : 4% of tax plus surcharge




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RESIDENTIAL STATUS & SCOPE OF INCOME Scope of total income The scope of the total taxable income for a person for a previous year is dependent on his residential status – which may be (a) resident (b) non-resident. A resident’s total income comprises all his income accrued/ received or deemed to accrue/ received within and outside India. In simpler words, a resident’s global income is taxable in India. A non-resident’s total income comprises only that income which has accrued/received or is deemed to have been accrued/received in India. In other words, a non-resident shall not be liable to pay tax in India for any income accruing or arising outside India. Residential status Residential status is the principal factor on which the tax liability for an assessee is determined. The rules for determining the residential status for the different categories of persons are different. Please note that the residential status is determined separately for each year and thus an individual may have different residential status in different years. An individual may be either resident or a non-resident. An individual will be resident in any previous year, if he satisfies at least one of the following basic conditions:

i. He is in India during the previous year for a period of 182 days or more; or ii. He is in India during the previous year for a period of 60 days or more and has been in India for 365 days

or more days during the four years immediately preceding the previous year. Exception: However, if the individual is an Indian citizen and leaves India in any previous year as a member of the crew of an Indian ship or for the purpose of employment, he will have to stay in India for at least 182 days (and not 60 days as in condition (ii)) to qualify as a resident. Similarly, if any Indian citizen or a person of Indian origin who is living outside India and comes on a visit to India in the previous year, he will have to stay in India for 182 days (and not 60 days as in condition (ii)) to qualify as a resident. If an individual doesn’t satisfy any of the two conditions as specified above, he shall be treated as a ‘Non-resident’.




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Exempt Income The ITA has enumerated a list of incomes under section 10 which are totally exempt from tax. In other words, these incomes do not get added to a person’s total income. The foregoing paragraphs lists out some of the most common incomes which have been exempted from tax under section 10 of the Act. Agricultural income [Section 10(1A)]

Agricultural income means: a. Any income derived from agricultural land which is situated in India and used for agricultural purposes; b. Any income derived from agricultural operations including processing of the agricultural produce; c. Any income from farmhouse.

However, in case of individuals having net agricultural income exceeding Rs. 5,000 and non-agricultural income exceeding the basic amount not chargeable to Tax, will have to follow the prescribed procedure for the partial integration of agricultural income and pay the incremental Taxes on the same accordingly. Partner’s share of profit from a firm and Income received from HUF A partner’s share of profit in the income of a partnership firm or Income received from HUF will be exempt. Gratuity, Pension, Encashment of Leave Salary, Retrenchment Compensation and Voluntary Retirement Compensation All of the above constitute the retirement dues receivable by an employee at the time of retirement or resignation. Any amount received under these headings would be exempt subject to the prescribed limits. The Taxable amount shall be taxed under the head “Income from Salaries”. Amount received under a Life Insurance Policy [Section 10(10D)] Any sum received under a life insurance policy, including the bonus, will be exempt. Income of minor child [Section 10(32)] Any income of a minor child that is clubbed with the income of parent is eligible for an exemption of the actual amount or Rs. 1,500, whichever is less, in respect of each child. Reverse Mortgage scheme [Section 10(43)] Any amount received by an individual as a loan, either in lump sum or in instalments, in a reverse mortgage transaction shall be exempt. Dividends received from mutual funds, on which dividend distribution tax has already been paid, are exempt from tax in the hands of the investor.




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Computation of Total Income Any income that is taxable has to be categorized into any one of the five heads of income that have been notified by the ITA. For all purposes of computing the total income or calculating the Income-tax, income shall be classified under the following heads of income: The total income is characterized under five different heads of income A. Income from Salary B. Income from House Property C. Income from Business & Profession D. Income from Capital Gains E. Income from Other Sources Income-Tax under the head salaries “Employer-Employee” relationship is a must before charging any income under the head “Salaries”. In the absence of this relationship, the income can never be characterized as salary. For instance, a partner in a partnership firm is not an employee of the firm, so the salary paid to a partner is not accounted for under the head Salaries. Similarly, a college teacher doing assessment of papers for the University is not an employee of the University. So, any honorarium paid to her by the University is not salary. Chargeability Any salary due to an employee, whether paid to him during that previous year or not, shall be chargeable to Income-tax for that previous year. Similarly, if any advance salary is paid to an employee, the same shall be chargeable to tax in the year of payment, even if the same has not become due to the employee. Thus, salary is taxed on due or receipt basis, whichever is earlier. The term salary has been defined to include:

a. Wages; b. Annuity/ pension (received from former employers); c. Gratuity (to the extent it is not exempt u/s 10); d. Other retirement benefits like leave encashment to the extent it is not exempt u/s 10; e. Fees, commissions, perquisites or profits in lieu of salary; f. Advance salary; g. Allowances




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Allowances An allowance is payment made to an employee in addition to salary to meet specific expenses related to the performance of duties. The common allowances that are offered to employees in their salary structure are House Rent Allowances, Children Education Allowance, entertainment allowance, transport allowance, telephone allowance, medical allowance, dearness allowance, overtime allowance, special allowance, etc. Tax treatment of allowances The allowances would be fully taxable, exempt to the extent amount spent by the employee or exempt to the extent notified by the ITA. Medical allowance, Overtime allowance, special allowances are examples of allowances which are fully taxable. Uniform allowance, helper allowance, conveyance allowances are examples of allowances which are exempt to the extent of amount received by the employee and the amount spent for the specified purposes, whichever is lower. House Rent Allowance (HRA) Being the most common allowance claimed by employees, merits a brief explanation for the calculation of exemption here. The HRA received by the employee from the employer is exempt subject to limits prescribed under Rule 2A of the Income Tax Rules. According to this rule the lower of the following three parameters will be exempt from Tax and the balance will be Taxable as salary:

a. Actual amount of HRA received; b. Amount equal to 50% of salary for the relevant period, in case the rented house is situated in the four metro

cities – Mumbai, Delhi, Kolkata and Chennai, and 40% of salary if the house is situated in any other cities; c. Rent paid in excess of 10% of salary for the relevant period.

Salary for this purpose means basic salary and dearness allowance; to the extent it forms part of salary for the purpose of retirement benefits. All other allowances and perquisites will be excluded.

However, it may be noted that HRA exemption is not available in case the residential accommodation is owned by the employee or in case he is not incurring any expenditure on rental payment. Rules regarding HRA While the House Rent Allowance (HRA) is offered to almost all salaried individuals by their employers, there are a few cases in which tax exemption on HRA is not allowed. Listed below are the cases-

Since HRA is meant to provide for the cost of your rented accommodation, you cannot claim it when living in a self-owned house.




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If you are staying with your parents and produce a rent receipt in the name of your parents, you can claim HRA exemption. However, your parents need to add the same rent into their income at the time of filing income tax returns.

You cannot pay rent to your spouse and claim HRA deduction on it. Apart from these, you should note that the landlord’s PAN is required for HRA exemption in case

the annual rent exceeds Rs 1,00,000. If the landlord does not possess a PAN, a signed declaration by them should be submitted.

Leave Travel Allowance (LTA)

Leave Travel Allowance (LTA) is the most common element of compensation adopted by employers to remunerate employees due to the tax benefits attached to it.

Who and what is covered?

LTA exemption can be claimed where the employer provides LTA to employee for leave to any place in India taken by the employee and their family. Such exemption is limited to the extent of actual travel costs incurred by the employee. Travel has to be undertaken within India and overseas destinations are not covered for exemption. For example, where an employer provides LTA of Rs 25,000, but an employee spends only Rs 20,000 on the travel cost, then the exemption is limited to only Rs. 20,000.

Travel cost means the cost of travel and does not include any other expenses such as food, hotel stay etc. The meaning of ‘family’ for the purposes of exemption includes spouse and children and parents, brothers and sisters who are wholly or mainly dependent on you.

An individual would not be able to claim the exemption in relation to his parents, brother or sisters unless they are wholly or mainly dependent on the individual.

Is exemption available every year?

No. The tax rules provide for an exemption only in respect of two journeys performed in a block of four calendar years. The current block runs from 1.4.2018 to 31.03.2021.

Proof of travel

The individual needs to submit proof of travel to his/her employer and also keep copies for his or her own records. Such proofs are helpful at the time of the audit of the tax return of the individual. Proof of travel could be, for example, tickets, boarding passes, invoice of travel agent, duty slip etc

Perquisites Perquisites have been defined to mean and include any benefits, amenities, services or facilities granted to employees over and above the salary. It basically is a personal advantage to employees.


https://www.paisabazaar.com/tax/income-tax/



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Taxable Perquisites Section 17(2) of the Act includes the following benefits granted to employees as perquisites:

i. Value of rent-free accommodation provided to the employee by his employer; ii. Value of any concession in the matter of rent in respect of any accommodation provided to the employee

by his employer; iii. Any obligations of the employees being met by the employer;

iv. The value of any specified security or sweat equity shares allotted or transferred, directly or indirectly, by the employer, or former employer, free of cost or at concessional rate to the assessee;

the amount of any contribution to an approved superannuation fund by the employer in respect of the assessee, to the extent it exceeds one lakh rupees;

vi. Value of any other fringe benefits. Tax-free perquisites Some of the Tax-free perquisites as provided in the Act are given below for a ready reference:

i. Value of any medical facility provided to the employee or any member of his family in a hospital, clinic, dispensary or nursing home maintained by the employer;

iii. Tea, snacks and other refreshments provided by the employer during office hours will be exempt; iv. Non-transferable meal vouchers which is usable at eating joints and where the value of each voucher is up to

Rs. 50 per meal; v. Interest-free or concessional loans to employees up to Rs. 20,000; vi. Expenditure on telephones, including mobile phones, incurred by employers on behalf of employees.

Standard Deduction – Section 16(ia)

For medical reimbursement and Transport allowance a standard deduction of Rs. 50,000 is available now without submission of supporting documents.




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Perquisites: Rent Free Accommodation Accommodation: - For purpose of valuation of the perquisite of unfurnished accommodation, all employees are divided into two categories: (I) Central Govt. & State Govt, employees; and (ii) others.

• For employees of the Central and State governments the value of perquisite shall be equal to the license fee charged for such accommodation as reduced by the rent actually paid by the employee.

• For all others, i.e., those salaried taxpayers not in employment of the Central government and the State government, the valuation of perquisite in respect of accommodation would be at prescribed rates, as discussed below:

1. Where the accommodation provided to the employee is owned by the employer, the rate is 15% of 'salary' in cities having population exceeding 25 lakhs as per the 2001 census. The rate is 10% of salary in cities having population exceeding 10 lakhs but not

exceeding 25 lakhs as per 2001 Census. For other places, the perquisite value would be 7.5% of the salary.

2. Where the accommodation so provided is taken on lease/ rent by the employer, the

prescribed rate is 15% of the salary or the actual amount of lease rental payable by the employer, whichever is lower, as reduced by any amount of rent paid by the employee.

For furnished accommodation, the value of perquisite as determined by the above method shall be increased by-

• i) 10% of the cost of furniture, appliances and equipment’s, or • ii) Where the furniture, appliances and equipment’s have been taken on hire, by the amount of

actual hire charges payable.

The value of Perquisite is reduced by any charges paid by the employee himself. Salary definition for RFA is Taxable salary (after addition of Taxable allowances, Perks & Annual Bonuses)

Perquisites: Transfer of Moveable assets – Rule 3 (7viii) Where a movable asset is transferred by an employer to his employee directly or indirectly, the perquisite value shall be the actual cost to the employer minus the cost of wear & tear @10% for each completed year during which such asset was put to use. In the case of Motor cars, the normal wear & Tear would be @20% by the reducing balance method for each completed year of use.




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Employee Stock Option Plan

ESOP’s, imply options/rights of an employee to purchase a certain number of shares in a company at a predetermined price. Such option/right is vested to the employee over a period of time and the price at which such an option/right can be exercised is lower than the prevailing market price of the share of the company.

The main aim of any ESOP policy is to encourage an employee to become a stakeholder in the company, so that with the growth of the company, he/she grows as well. The vesting of the stock option happens over a period of the employee’s association with the company. Once this option vests with the employee, his/her decision to buy (or not) such shares have to be conveyed during the vesting period. When this option/right stands vested, the employee becomes entitled to exercising such an option over a prescribed period, which would allow subscribing to the shares under the ESOP scheme at the exercise price, which is at a discount to the prevailing market price. If ESOP’s are exercised, the employee pays the exercise price and is allotted the shares. At that time, such an employee may sell the stock at a gain or hold on to it in hope of further price appreciation.

ESOP is taxed in the hands of employee twice

First Level: As a Perquisite when the employer exercises the option (purchase the share from employer). The perquisite value is computed as the excess of the fair-market value (FMV) of the share on the date of exercise over the exercise price. The employer is required to withhold tax at source in respect of such a perquisite.

Second level: As a capital gain when employee disposing of the shares, the normal equity taxation applicable depends upon the holding period & listed/unlisted share.

Professional Tax – Any Professional Tax deducted from an employee’s salary can be reduced from the annual salary income to arrive at taxable salary.




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Income from House Property “Income from House Property” is the second head of income as laid down under the scheme of taxation. The ownership of the property may be direct or even deemed (as per the prescribed provisions). Computation of income from house property involves determining the annual value of the property under different scenarios, deductions available from the annual value and some relevant provisions. Chargeability Any income earned by a person from properties owned by him/her would be Taxed under this head. The three most important conditions that are to be fulfilled for charging income under this head are:

i. The person should own the property; ii. The property should not be used for the purposes of business by the person; iii. The property should consist of both land and buildings.

In other words, if a person earns any income from a plot of land, whether vacant or not, such income cannot be counted under this head of income. Taxability of income in whose hands The income is always taxable in the hands of the owner/ deemed owner of the property. The income is chargeable in the hands of a person, even if he is not the registered owner of the property. Transfer of property to one’s spouse or minor children (except in prescribed circumstances) without adequate consideration is one example where the transferor is deemed to be the owner of such property for calculating income under house property. Computing income The annual value of the property is the most important factor for calculating the income under this head. Annual value begins by calculating the Gross Annual Value (GAV) of the property. For determining the GAV, the higher of the following values will be considered: a. The sum for which the property might reasonably expect to be let out from year to year based on higher

of municipal valuation and fair rent; b. In case the property is subject to the Rent Control Act, then the value, determined as above, cannot

exceed the Standard Rent as set by this Act; c. Where the property is let out and the rent received or receivable is more than the amount determined in

‘a.’ or ‘b.’ above, then the annual value would be the actual rent received; d. In case of a let-out property, if there is any portion of rent that has remained unrealized, the same will be

deductible from the actual rent subject to fulfilment of prescribed conditions




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e. If an individual is in occupation of a house for the purposes of his residence, the annual value of the

property shall be considered to be nil (provided he does not derive any other benefit from the property). Such a property is also called as ‘Self Occupied Property’;

f. If the individual has more than two houses for the purposes of his residence, the annual value of any two

of such houses, at his option, would be considered nil. Notional income of the other residential house would be liable to tax.

Determination of the Net Annual Value The following amounts are required to be reduced while determining the Net Annual Value:

a. Vacancy Allowance: You can claim vacancy allowance when you have put your efforts, however the house is still not let out.

b. Unrealized Rent – in case of a let-out property, where any rent is unrealized during the year, the same can

be deducted from the GAV, provided the prescribed conditions are satisfied by the defaulting tenant.

c. Municipal Taxes – Taxes levied by the local authorities, only if they are actually paid by the owner during the relevant previous year. Taxes, if paid, by the tenant will not be allowed as a deduction for the property owner; Deductions from Net Annual Value Under Section 24

a. For let-out properties In case of let out properties, 30% of the Net Annual Value (also known as Standard Deduction) and the full interest paid/ payable for the acquisition / construction/repair of the property is allowed as deduction.

b. For self-occupied properties – (Any two of the house considered as self-occupied) Interest paid/payable for the acquisition/construction of the property is allowed as deduction in aggregate upto Rs. 2 Lakh per annum. Interest paid/payable for the repair/renovation of the property is allowed as deduction in aggregate upto Rs. 30,000 per annum. In cases where the property is acquired/ constructed using borrowed funds, the interest payable/ paid up to the period prior to the previous year in which the property is acquired or constructed would be allowed in five equal instalments starting from the year in which the property is acquired/ constructed (also known as ‘Pre-construction Period Interest’).




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The pre-construction interest is allowed for deduction from Income under Section 24 in 5 equal annual instalments. To claim deduction u/s 24 the construction of the house should be completed & ready for occupation. Limit of total 2 Lakh deduction is aggregate of amount eligible under Current year of Interest as well Pre construction period 1/5 eligible amount. Income from Business/Profession “Income from Business and Profession” is the third head of income when arranged chronologically as per the sections. The income offered under this head of income is not the gross income earned from business or profession, but the profits (losses) computed by deducting the eligible expenses. Chargeability The profits and gains of any business or profession carried on by an individual at any time during the previous year shall be chargeable under this head of income. The value of any benefits or perquisites arising from the business or exercise of a profession shall also be chargeable here. The scope of income under this head also covers any interest, salary, bonus, commission or remuneration due to or received by a partner of a firm. Computation of Income Profits and gains under this head are computed by deducting the admissible expenses from the gross sale (in case of a business) and receipts (in case of a profession). Expenses under the Act are broadly classified as follows: i. Expenses that are expressly deductible; ii. Expenses that are generally deductible; and iii. Expenses that are expressly disallowed. All the expenses which are incurred wholly and exclusively for the purposes of the business/ profession carried on during the previous year are generally allowed to be deducted while calculating the profits of the business. Some of the expenses that are expressly allowed as deductions are as follows: i. Rent, rates and Taxes, repairs and insurance for building, plant and machinery, furniture; ii. Insurance premiums paid against risk of damage or destruction of stocks used for the business; iii. Bonus or commission paid to employees; iv. Interest paid on borrowed capital; v. Depreciation Expenses not deductible

i. Income Taxes paid on profits or gains of any business or profession;




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ii. Any payment or payments made towards any expenditure, exceeding Rs.10,000 in a day, made by any mode other than an account payee cheque or an account payee bank draft;

iii. Payment of interest on capital to partners in a partnership firm in excess of 12% p.a.; Iv. Payment of salary, bonus, commission or any other form of remuneration paid to partners in a partnership

firm in excess of the limits specified under section 40(b) of the Act.

Section 40(b) - minimum of following two 1. amount paid or payable to working partners in as authorised in partnership deed 2.As per Method given On the first 3,00,000 of book profit or in case of loss

90% of book profit or Rs. 1.5 lakh whichever is more

On the balance book profit

60% of the book profit

These are just some of the expenses that are not deductible in the computation of profits and gains.

Tax aspects of investment products Income from investments is subject to tax as per the provisions of the Income Tax Act, as amended from time to time. The following heads of income from investments are subject to tax, unless specifically exempt: Dividend income Interest income Realized capital gains

Dividends and interest are paid out by the issuers of securities, while capital gain (or loss) is realized when investors make the decision to sell or redeem their investment. If the sale or redemption is at a price that is higher than the cost of purchase, there is a capital gain. If the redemption price is lower than the cost, there is a capital loss. Interest and dividend income are taxable as income from other sources. Realized gains are taxable as capital gains. Types of tax benefits The form in which a tax benefit may be offered can vary. The following are the three types of tax benefits that have been offered on investments. a. Exemption Certain types of income are exempted from tax. In other words, one need not pay any tax on such income. If the dividend received from companies on equity shares held is less than Rs.10,00,000/- then the dividend income is exempt from tax in the hands of the investor. A tax of 10% (plus applicable surcharge and health and education cess) is applicable in case of




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all resident tax payers such as individuals, HUFs, Partnership firms and private trusts for dividend income of more than Rs.10,00,000 received from a domestic company or companies. (not applicable for MF dividends) b. Deduction Either the investment made, or the income received on the investment, or both, can be deducted (usually up to a certain limit) from the taxable income. In other words, the income on which tax will be calculated gets reduced to the extent that some income received or investment made. There is a list of eligible investments provided under Section 80C. Investments in these instruments made up to a maximum limit of Rs.1,50,000 in a financial year, are available as deduction. c. Rebate After income tax is computed, the actual tax payable is reduced, if a rebate is allowed on account of specific investment that was made. In other words, based on a pre-defined formula, the amount of tax payable is reduced, since the investor has made certain investments that are eligible for such rebate. For example, section 87 A provides a rebate of Rs.12500/- for all individual assesses whose income does not exceed Rs.500,000. d. Exempt-Exempt-Taxable (EET) Regime Tax benefits are available to investors either on the amount of investment made, or on the income earned from their investments, or both. In order to rationalize the tax benefits, the government has introduced a deferred taxation regime for several investments. The logic is that investors would enjoy a tax deduction on their investments, earn a tax-free income on the investment, but pay income tax on the investment when it is redeemed. Such a tax regime would encourage long term saving, so that the incidence of tax is deferred or postponed to a later date. This regime is called EET, because: Investment made is Exempt Income earned is Exempt Redemption or sale proceeds are Taxable




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Capital Gains Any Income derived from a Capital asset movable or immovable is taxable under the head Capital Gains under Income Tax Act 1961.Profits or gains arising from the transfer of a capital asset is chargeable to tax in the year in which transfer take place under the head “Capital Gains”.

The Act defines the following concepts as follows: Transfer (section 2(47)): Transfer in relation to a capital asset includes the following: sale; exchange; relinquishment of the asset; extinguishment of any rights in the asset; compulsory acquisition of an asset under any law; conversion of the asset into stock-in-trade of a business; maturity or redemption of a zero-coupon bond.

However, the following modes are specifically excluded from the definition of transfer: Gift; Distribution of capital assets on partition of a HUF; Transfer under a will or an irrevocable trust; Conversion of bonds / debentures/ deposit certificates of a company into shares.

Capital Asset (section 2(14)): Capital Asset means property of any kind - fixed, circulating, movable, immovable, tangible or intangible - whether or not connected with his business or profession.

Exclusions — • Stock-in- trade, raw materials, consumables stores held for business purposes; • Personal effects of the assessee (excluding jewellery, archaeological collections, paintings, sculptures, etc.);

• Agricultural land in a rural area;

Based on the period of holding, capital assets are classified as: The Capital Gains have been divided in two parts under Income Tax Act 1961. One is short term capital gain and other is long term capital gain.

i. Short-term capital asset (section 2(42A)) means a capital asset held by an assessee for not more than 36 months (i.e. 36 months or less) immediately preceding the date of its transfer. However, in case of the following assets, the aforesaid threshold is reduced to 12 months:

Listed equity or preference shares in a company; Listed Securities; (NCD’s, Bond’s, Debentures) Equity MF Units of Mutual Funds; zero-coupon bonds.

In following Cases aforesaid threshold is reduced to 24 months :




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Unlisted Securities Immoveable properties

ii. Long-term capital asset: (section 2(29)) means a capital asset which is not a short-term capital asset. Capital

gains are generally charged to Tax in the year in which the ‘transfer’ takes place,

Taxability of short-term capital gains: Section 111A of the Income tax Act provides that those equity shares or equity-oriented funds which have been sold in a stock exchange and securities transaction tax is chargeable on such transaction of sale then the short-term capital gain arising from such transaction will be chargeable to tax @ 15%. Sale of Holding in less than 1 year under Listed Shares is considered STCG.

Short-term capital gains on physical gold, Debt MF units/Gold ETF’s held for less than 36 months will be added to investor's income and taxed as per the applicable slab rate. Immoveable property and Unlisted share held for less than 24 months considered as STCG, will be added to investor's income and taxed as per the applicable slab rate

Long Term Capital Gain: Long term capital gains are arrived at after deduction of (Expenses on transfer, indexed cost of acquisition and the indexed cost of improvement) from the sale consideration.

The Central govt. notifies cost inflation index for every year. The indexed cost of acquisition is calculated by multiplying the actual cost of acquisition with C.I.I of the year in which the capital asset is sold and divided by C.I.I of the year of purchase of capital asset. Similarly, the indexed cost of improvement can be calculated by using the C.I.I of the year in which the capital asset is improved.

Where the capital asset was acquired before the year 1st April 2001 then the cost of acquisition shall be the fair market value as on 1st April 2001 or the actual cost of its acquisition whichever is higher. Base year is taken as 2001-02 with Base value 100 and every year govt release C.I.I to calculate Capital gains.

Taxation of Long-term capital gains: Long term capital gains on various assets like physical gold, Gold ETF, Debt MF, FMP’s as held for more than 36 months will be taxed at 20% after providing for indexation benefit. Immoveable property and Unlisted share held for more than 24 months considered as LTCG, will be taxable @ 20% with Indexation.

Section 87A Rebate up to Rs. 12,500 for Income less than 5 Lakh is not available if taxable income is only under the head capital gains.

No deduction is allowed from the long-term capital gains from section 80C to 80U. But in case of individual and HUF where the income is below the basic exempted limit the shortage in basic exemption limit is adjusted against the long-term capital gains as well as short term capital gains.

Section 112(1) provides that any capital gain arising from a long term capital asset being the listed securities, or units or Zero Coupon bonds which are sold outside the stock exchange (not suffered STT) and buy back of share by a listed company the long term capital gain shall be calculated on such securities as below:




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a) Tax arrived at @ 20% on such long-term capital gain after indexation u/s 48 or b) Tax arrived at @ 10 % on such long-term capital gain without indexation whichever is less.

Capital Gain on Listed Equity Shares & Equity MF’s

The long-term capital gain on equity shares or units of equity oriented mutual fund which are sold in the stock exchange and on which securities transaction tax is paid.

Union Budget 2018 declared by Finance Minister Arun Jaitley on 1st February 2018 brought a modest change in the long-term capital gains tax regime. After this change under section 112 A of Income tax act long term capital gains arising from transfer of listed equity shares & units of equity-oriented fund will be charged at 10% tax rate without any inflation indexation benefit. The tax will be charged only if LTCG of such nature exceeds Rs. 1 lakh.

However, the gains made on and before 31st January 2018 will be exempted from this new rule.

If the asset is acquired on or before January 31, 2018, then cost of acquisition shall be

Actual Cost of Acquisition; OR

Lower of “ Actual Sale Value or Fair Market Value as on 31.01.2018”;

Whichever is higher.

The restriction up to “lower of sale value or Fair Market Value” is provided so that no long-term capital loss shall arise on such computation.

In case of Bonus shares and right shares the period of holding for capital gain purposes shall be calculated from their date of allotment (means allotment date of bonus shares).

IMP : LTCG on transfer of bonus and rights shares acquired on or before 31 January 2018, shall be calculated by considering the FMV on 31 January 2018 as the Cost of Acquisition of such shares thereby exempting gains until 31 January 2018 from tax.

At the time of Sale : First in First Out method is applied to calculate Long term or short term capital gains.




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Taxation of NCDs/Bonds/Debentures/Zero Coupon Bonds : Interest income from an NCD and tax treatment is exactly similar to any other interest income such as interest income from FDs. In other words, interest income from NCDs will be subjected to tax at normal slab rates by including it in 'Income from other sources'. Long term capital gain If you sell NCDs/Bonds/ Zero Coupon Bonds on the stock exchange after holding for more than 12 months & Unlisted NCD’s, Bonds & Debenture sold after holding for 3 years. then such gains are taxable @ 10.40 per cent (including education cess of 4%) without indexation.

Short term capital gain If you sell NCDs/Bonds/ Zero Coupon Bonds on the stock exchange after holding for less than 12 months & Unlisted NCD’s, Bonds & Debenture sold for holding period of less than 3 years. then such gains are added in taxable income and taxable at slab rates.

While short term capital gains on sale of NCDs would be taxed at normal rates, long term capital gains on sale of NCD/Zero coupon bond/Bonds (a listed security) are taxed at concessional rates u/s 112 of IT Act. However, as the benefit of cost indexation is not available in case of bonds and debentures; therefore, long term capital gains from NCDs/Bonds/Debentures are always taxable

Dividend Distribution Tax

Dividend distributed by an Indian Company is exempt from income-tax in the hands of shareholder. A tax of 10% (plus applicable surcharge and health and education cess) is applicable in case of all resident tax payers such as individuals, HUFs, Partnership firms and private trusts for dividend income of more than Rs.10,00,000 received from a domestic company or companies. (not applicable for MF dividends)

The Indian Company is liable to pay Dividend Distribution Tax (DDT) @ 17.65 percent (i.e. exclusive of surcharge and education cess) on such dividends.

Income received by unit holders from an Equity Mutual Fund is subject to DDT rate of 11.648%.

The Mutual Fund deduct DDT @ (29.12% (inclusive of surcharge and education cess) on income distributed by a money market mutual fund, liquid fund & Debt MF.




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F&O Tax treatment

From the reading of the above it is clear that trading in derivatives including commodity derivatives on a recognized stock exchange will not be considered as a speculative transaction and hence not treated as speculative business.

Therefore, since these are not considered as speculative business, therefore income from such transactions will be considered as normal business income and loss from such transactions will be considered as normal business loss.

Expenses

Expenses such as postage, conveyance and telephone, incurred for carrying on the business can be claimed as business expenses. You can also claim depreciation on assets used for the business or profession

Capital Gain in case of Inherited/Gifted property

In case of inherited property, the period of holding is counted from the date of purchase of property by the original owner who has actually acquired the property, other than by way of inheritance and gift. For an inheritor, the period for which the property was held by the first owner is included too.

For example, Arun & Ravi inherited a property on May 15, 2019 from their father who purchased the property on August 30, 1996. Arun & Ravi decide to sell the property on September 30, 2019. Even though the property is held by them for less than three years, the gains shall be long term since the period for which the property was held by the previous owner, their father, is included too.

From AY 2015-16, with prospective effect, advance received and forfeited, in connection with transfer of capital asset, will be treated as income from other sources, and will not be deducted from indexed cost of acquisition to avoid double taxation. So, any such amount forfeited during FY 2014-15 shall be considered as income from other sources. However, any such amount forfeited prior to FY 2014-15 shall be reduced from Acquisition price (or previous owner’s cost of acquisition or fair value) before applying the cost indexation.

This method of computation remains exactly the same in case of gift deed, will or irrevocable trust and distribution of the assets of an HUF as well.

Capital Gain Deductions U/s 54 In the calculation of capital gains for tax, certain exemptions are provided by the Income Tax Act. These exemptions are available as deductions from taxable income. Section 54 exempts long-term capital gains from sale of residential house from tax to the extent that the gains have been invested in another up to two residential properties purchased or constructed in India. This

exemption is applicable only to individuals and HUFs. The other residential property should




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have been purchased within one year before or two years after sale of the first residential house or construct one residential house in India with in a period of 3 years after the date of transfer. Section 54EC, exempts long-term capital gains on the transfer of Land or Building or both if they are invested in bonds specified for this exemption within a period of six months after the transfer in the financial year of the transfer or the subsequent financial year. This exemption is available up to a limit of Rs. 50 lakhs. The lock in period is of 5 years. Section 54 B, Exempts LTCG on transfer of land used for Agriculture purpose to Individual & HUF assessee. Condition for exemption is that assessee or his parents must have used the land for preceding 2 years for agriculture purpose and Within a period of two years from the date of transfer of old land the taxpayer should acquire another agricultural land. Amount of exemption: Exemption under section 54B will be lower of the following:

1. Amount of capital gains arising on transfer of agricultural land; or 2. Investment in new agricultural land

Section 54 F: Where an Individual transfers any Long-term capital asset (not being a residential house) and invest the net Sale proceeds to acquire a residential house, the deduction u/s 54 F Can be Claimed provided following conditions are satisfied. 1. The assessee does not own more than one residential house on the date of transfer of asset (excluding one purchased to claim deduction u/s 54F). 2. Whole of Proceeds from sale of asset required to invest. Otherwise proportionate capital gain will exempt. 3. The other residential property should have been purchased within one year before or two years after sale of the first residential house or construct one residential house in India with in a period of 3 years after the date of transfer. Capital Gain Account deposit scheme 1988: - Under Section 54, 54 B & 54 F, Although Assessee has time to invest the capital to get exemption. However, to get exemption benefit, Assessee has to deposit the capital gain amount in this specified account before the due date of furnishing of return. The proof of such deposit shall be attached with the return.




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INCOME FROM OTHER SOURCES This is the residuary head of income and sweeps in, all such taxable income, profits and gains that fall outside the other specific heads viz. Salaries, Income from house property, Profit and Gains of Business or Profession, Capital Gains Chargeability & nature of income Any item of income which is not covered in any of the earlier heads of income is included under this head. The Act enumerates the following types of income which would be chargeable to Tax under this head: a. Dividends (excluding Dividend income referred to in section 115-O which is exempt); b. Winning from lotteries, crossword puzzles, races, card games and other games, gambling or betting etc.); c. Any sum received under a Keyman insurance policy including amount allocated by way of bonus on such

policy, if not chargeable under the earlier heads; d. Interest on securities if not chargeable under the head business income; e. Income from letting of machineries, plants or furniture belonging to assessee, if not chargeable under the

head business income; f. Deemed gifts (discussed separately).

Deemed gifts

In terms of clause (vii) to section 56(2) of the Act, specified gifts received by an individual or HUF is chargeable to Tax, subject to certain exclusions. The deemed gifts covered by the provision are as follows: Any sum of money received without consideration from persons in excess of Rs. 50,000 during a given

year, the whole of such aggregate sum; Any immovable property without consideration the stamp duty value of which exceeds Rs. 50,000, the

stamp duty value of such property; Any movable property without consideration, the aggregate fair market value of which exceeds, Rs.

50,000, the whole of such fair market value; Any movable property for an inadequate consideration, the difference between the fair market value and

the consideration, provided the difference is greater than Rs. 50,000; (Property means capital assets of the assessee in the nature of land or building or both, shares & securities, jewellery, bullion, paintings, drawings, archaeological collections, sculptures or any art work)




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Exclusions The above provision would not be applicable to the money or property received: a. from any relative b. on the occasion of marriage of the recipient c. under a will or inheritance d. Amount received from any local authority f. Amount received from any fund or foundation or university or other educational institution or hospital or

other medical institution or any trust or institution (Relative means spouse of the individual, brother or sister of the individual, brother or sister of the spouse of the individual, brother or sister of either of the parents of the individual, any lineal ascendant or descendants of the individual, any lineal ascendants or descendants of the spouse of the individual, and spouse of the persons referred to hereinbefore below) Deductions Any expenditure (not being in nature of capital expenditure or personal expenditure) laid out or expended wholly and exclusively for the purpose of making or earning income chargeable under the head ‘Income from Other Sources’, is deductible. However, in case of income in the nature of winning from lotteries, cross word puzzles, races including horse race and games of any sorts, etc, no deduction are allowed for expenses or allowances incurred in connection with such income. Further, in case of pension received by the family of a deceased employee from the employer the deduction available would be lower of 1/3rd of such pension or Rs.15,000. Gambling - TDS If you receive money from winning the lottery, Online/TV game shows etc., it will be taxable under the head Income from other Sources. The income will be taxable at the flat rate of 30% which after adding cess will amount to 31.2 %. Incomes from following sources come under this category: Lottery Game Show or any entertainment program on television or electronic mode Crossword Puzzle Gambling or betting Races including Horse races.

TDS Applicability If the Prize money exceeds Rs 10,000, then the winner will receive the prize money after the deduction of TDS @31.2% u/s 194B.It does not matter whether the income of the winner is taxable or not. The prize distributor is liable to deduct tax at the time of payment. In the case of winnings from horse races, TDS will be applicable if the amount exceeds Rs 10,000. TDS applicable on Interest on Bank & Post Office deposits: No TDS applicable if Interest on Bank & Post Office deposits is less than 40,000 p.a.




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CLUBBING OF INCOME Sometimes an assessee can transfer his property or income to other related people in such a manner so as to keep the Tax liability to minimum or even avoid paying Taxes. Such transfers are nothing but attempts to reduce Tax liability by transferring income or sources of income to people, who are either not paying any Tax currently or are subject to lower Tax rates than the transferor. In order to curb such practices, the Act has included provisions for “clubbing of income”. Any income arising to a person out of any money or assets transferred to him/her by any other person without adequate consideration, then such income shall be clubbed and assessed as income in the hands of the transferor. The various provisions that have been covered in the Act under “Clubbing of Income” have been summarized in the table below:

Section

Nature of Transfer of Income/ Assets

Clubbed in the hands of Conditions/ Exceptions

64(1)(ii) Any Salary, Com-mission, Fees or remuneration paid to spouse from a concern in which an individual has substantial interest

Spouse whose total income (excluding the referred salary income to be clubbed) is greater.

Clubbing provisions not applicable if: Spouse possesses technical or professional qualification; and remuneration is solely attributable to application of that knowledge/ qualification.

64(1)(iv) Income from assets transferred directly or indirectly to the spouse without adequate consid-eration

Individual transferring the asset.

Clubbing not applicable if the assets are trans-ferred: 1. Under an agreement to live apart. 2. Before marriage. 3. Income earned when relation of husband-wife does not exist.

64(1)(viii) Transfer of assets by an individual to a person for the immediate or deferred benefit of his Son’s wife

Individual transferring the Asset.

Condition: The transfer should be without adequate consideration.

64(1A) Income of a minor child

1. If the marriage subsists, in the hands of the parent whose total income is

Clubbing not applicable for:




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greater; 2. If the marriage does not subsist, in the hands of the person who maintains the minor child. 3. Income once included in the total income of either of parents, it shall continue to be included in the hands of same parent in the subsequent year unless the Assessing Officer is satisfied that it is necessary to do so (after giving that parent opportunity of being heard)

1. Income of a minor child suffering from any specified disability 2. Income on account of manual work done by the minor child. 3. Income on account of any activity involving ap-plication of skills, talent or specialized knowledge and experience.

64(2) Income of HUF from property converted by the individual into HUF property.

Income is included in the hands of individual & not in the hands of HUF.




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SET OFF & CARRY FORWARD OF LOSSES An assessee may also earn losses during a previous year. The losses that an assessee incurs under any head of income, is allowed to be set off against other incomes under that head of income or even other heads of income, subject to certain exceptions. In case the assessee has inadequate or no profits, against which the losses can be set-off, then the unabsorbed losses may be carried forward to the subsequent years for setting off against the profits in that year. The scheme of setting off of losses and their carry forward has been covered in the table below: Losses under the head ‘Income from House Property’ These losses can be set-off against income from other house properties as well as income under any other heads in the same year. The losses can be carried forward for a further period of 8 assessment years. Income tax specified limit of Rs. 2 Lakh Loss from House property to be set off from other heads of income in same FY. Losses under the head ‘Business / Profession’ The losses under this head can be set-off against income from any other businesses under the same head or from income under any other head except for ‘Income from Salaries’. The unabsorbed losses can be carried forward for 8 assessment years. Business losses, arising on account of depreciation (also referred to as unabsorbed depreciation) however can be carried forward without any limitation of time. The Act also makes a distinction between speculative and non-speculative business profits and losses. As per the provisions of the Act, losses arising from speculative businesses can be set-off only against profits arising from speculative businesses and not against any other income. Any unabsorbed speculative losses can be carried forward for a period of 4 assessment years only. Losses under the head ‘Capital Gains’ Any losses arising out of the transfer of short-term capital assets can be set-off against short-term capital gains and long-term capital gains, if any, during the relevant previous year. Long-term capital losses, however, can be set-off against long-term capital gains and not against any short-term capital gains. Any unabsorbed long-term and short-term capital losses can be carried forward for a further period of 8 assessment years. Any long-term capital losses, arising out of the sale of equity shares, through a recognized stock exchange or from the redemption of units of equity oriented mutual funds can be set-off against only long-term capital gains. Short term Capital Losses can be set off against Short term as well Long-term capital gain in current FY and can be carried forward upto 8 assessment years to set off from Long term as well short-term capital gains. Losses under the head ‘Income from Other Sources’




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Any losses arising under this head can be set-off against income under any other head, but any unabsorbed losses are not allowed to be carried forward. A specific source of income covered under this head – profits/losses from the activity of owning and maintaining race horses needs a special mention here. Any losses from this activity can be set-off only against the income from the same activity and not against any other income under any other head. The unabsorbed losses from the referred activity can be carried forward for a period of 4 assessment years. Dividend stripping provisions U/s 94(7) of Income Tax Act, IF following three conditions are satisfied then that is case of dividend Stripping i. He has bought the units within a period of three months prior to the record date; and ii. transfers/ sells such securities within 3 months of such record date or transfers/sells mutual fund units

within period of 9 months of such record date, iii. The dividend on such units received by him is exempted from tax then the short-term loss arising to the extent of the amount of dividend received is not considered. It means

that short term loss is not available for set off from other capital gains.




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DEDUCTIONS UNDER Unit VI-A In computing the total income of an assessee, deductions specified under sections 80C to 80U will be allowed from his Gross Total Income. All the deductions under these sections are grouped under Unit VI-A of the Act. However, the aggregate amount of deductions under this unit shall not, in any case, exceed the gross total income of the assessee. The deductions under this Unit are allowed for certain specified expenditures & payments made by the assessee during the previous year.

Some of the important deductions are discussed here:

1. SECTION 80C - DEDUCTION IN RESPECT OF LIFE INSURANCE PREMIA, CONTRIBUTIONS TO PROVIDENT FUND, ETC.

Any sums paid or deposited in the previous year by the assessee towards any or all of the following is allowed as a deduction under section 80C: Extent of deduction: 100% of the amount invested or Rs. 1,50,000/- whichever is less. 1. Life Insurance premiums for self, spouse and any child in case of individual and any member, in case of

HUF. (Up to the extent the premiums paid is not in excess of 10% of actual capital sum assured). 2. Payment towards a deferred annuity contract on life of self, spouse and any child in case of individual. 3. Contributions towards Statutory Provident Fund or Recognized Provident Funds or Approved

Superannuation funds; 4. Contributions to Public Provident Fund scheme, 1968, in the name of self, spouse and any child in case of

individual and any member in case of HUF. 5. Subscription to the NSC (VIII issue) & Accrued Interest every year on the Investment 6. Subscription to any units of any Mutual Fund referred u/s. 10(23D) (Equity Linked Saving Schemes). 7. Tuition fees (excluding any payment towards any development fees or donation or payment of similar

nature), to any university, college, school or other educational institution situated within India for the purpose of full-time education of any two children of individual.

8. Towards the cost of purchase or construction of a residential house property (including the repayment of

loans taken from Government, bank, LIC, NHB, specified assessee’s employer etc., and also the stamp duty, registration fees and other expenses for transfer of such house property to the assessee). The




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income from such house property should be chargeable to Tax under the head “Income from house property”.

9. Term Deposit (Fixed Deposit) for 5 years or more with Scheduled Bank in accordance with a scheme framed

and notified by the Central Government. 10. Account under the Senior Citizen Savings Schemes Rules, 2004.

2. SECTION 80D – Deduction in respect of Medical Insurance Premium

Deduction of Rs. 25000/- is allowed if the same is paid as premium for Medical Insurance taken for self, spouse, parents or children of the assessee in the case of Individual; or towards preventive health check-up (max Rs. 5000). In case any of assessee is a senior citizen, the deduction allowed is Rs. 50000/-

Additional Rs. 25000/- is allowed as deduction if the same is paid as premium for Medical Insurance taken for parents. In case the parent is a senior citizen, the deduction allowed is Rs. 50000/- . Deduction on account of medical expenditure incurred (instead of sum paid to effect any insurance of health) to be allowed in case of a senior citizen – maximum Rs. 50,000. 3. 80 E - DEDUCTION IN RESPECT OF INTEREST ON LOAN TAKEN FOR HIGHER EDUCATION Applicable only for Individuals Any amount paid by way of interest on loan taken from any financial institution or any approved charitable institution for his/her higher education or for the purpose of higher education of his/her spouse and children.

Relevant Conditions/Points

1. Amount should be paid out of income chargeable to tax. 2. Any course of study pursued after passing the Senior secondary examination or its equivalent from any

school, board or university recognized by the central govt. or state govt. or local authority or by any other authority authorized by the central govt. or state govt. or local authority to do so.

3. The deduction is allowed in the initial assessment year (i.e., the assessment year relevant to the previous year, in which the assessee starts paying the interest on loan) and 7 assessment years immediately succeeding the initial assessment year or until the interest is paid in full whichever is earlier. Extent of deduction: Entire amount of Interest




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4. SECTION 80G - DEDUCTION IN RESPECT OF DONATIONS TO CERTAIN FUNDS, CHARITABLE INSTITUTIONS, ETC. Any sums paid in the previous year as Donations to certain funds, charitable institutions etc. specified u/s. 80G (2). Donation in kind is not eligible for deduction and this deduction is applicable for all type of assessee. Deduction amount 100% or 50% is depend upon approval given by IT dept.

No Deduction shall be allowed under this section in respect of donation of any sum exceeding 2000/- unless such sum is paid by any mode other than cash & receipt for such donation also need to produce to get deduction.

5. 80 GG - DEDUCTION IN RESPECT OF RENT PAID Any assessee who is not receiving House Rent Allowance can claim - Any expenditure incurred by him on payment of rent (by whatever name called) in respect of any furnished or unfurnished accommodation

Relevant Conditions/Points 1. Such accommodation is occupied by him for his own residence.

2. This section shall not apply to an assessee if residential accommodation is owned by the assessee or by his spouse or minor child or where such assessee is member of HUF, by such family, at the same place where he is paying rent for residence. Extent of deduction: (a) Rs. 5,000 per month

Section 80 TTA – provides deduction for interest earned from saving bank A/c’s up to a limit of Rs. 10,000/- 80TTB in order to provide that Senior Citizens are allowed a deduction of up to INR 50,000 in respect of Income earned by such Senior Citizens from Deposits (Saving Account, Fixed Deposits and Time Deposits).




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Assessment Procedure a. Belated return u/s 139 (4) In case the return is not filed within due date, a belated return can be filed at (i) before the end of relevant assessment year or (ii) before the completion of assessment whichever is earlier. b. Revised return In case of any error or omission, the assessee is entitled to revise the return, provided the return has been filed within the aforementioned due date. Assessee may furnish a revised return (i) before the end of relevant assessment year or (ii) before the completion of assessment whichever is earlier. But, where the assessee has some capital loss or loss from business or profession to be carried forward he should file his return of income within the due date as prescribed u/s 139(1). Only Loss under the head house property can be carry forward if income tax returns not filled before the due date. It should also be noted that where a belated return is filed u/s 139(4), revised return u/s 139(5) can be filed after that belated return if the assessee discovers any omission or wrong statement in initially filed return.

Where return of income is filed after the due date, interest @ 1 % per month u/s 234A will be payable start from the next day of due date of filling of return. Fee for default in furnishing return of Income ( Section 234 F) (a) Rs. 5000 if the return is furnished on or before the 31st December of the assessment year. (b) Rs. 10,000 in any other case. However, the total income of the person does not exceed Rs. 5 Lakh, the fee payable under this section shall not exceed Rs. 1000/. Penalty for underreporting of Income Penalty for concealment of income or furnishing inaccurate particulars of income. Many times, a taxpayer may try to reduce his tax liability by concealing his income or by furnishing inaccurate particulars of his income. In such a case, by virtue of section 270 A, the taxpayer will be held liable to pay penalty for under reporting at the rate of 50% of tax payable and for misreporting of income at the rate of 200% of the tax.




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Misreporting of income is defined in Section 270A(9) as follows:

“The cases of misreporting of income referred to in sub-section (8) shall be the following, namely:

(a) misrepresentation or suppression of facts;

(b) failure to record investments in the books of account;

© claim of expenditure not substantiated by any evidence;

(d) recording of any false entry in the books of account;

(e) failure to record any receipt in books of account having a bearing on total income; and

(f) failure to report any international transaction or any transaction deemed to be an international transaction or any specified domestic transaction, to which the provisions of Chapter X apply.”

Cost Inflation Index for Capital gain calculations

Financial year Cost Inflation Index 2001-02 100 2002-03 105 2003-04 109 2004-05 113 2005-06 117 2006-07 122 2007-08 129 2008-09 137 2009-10 148 2010-11 167 2011-12 184 2012-13 200 2013-14 220 2014-15 240 2015-16 254 2016-17 264 2017-18 272 2018-19 280 2019-20 289




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Tax Planning – Questions Tax computation 1. Annual Salary Breakup of Mahesh (age 38 years) for FY2019-20 Basic Salary 4,16,000 House Rent Allowance 2,70,000 Dearness Allowance 1,50,000 Transport Allowance 40,000 Medical Allowance30,000 Entertainment Allowance 42,000 He paid monthly rent of Rs. 18000 per month. Calculate taxable HRA for FY2019-20. Assume Mahesh Lives in Mumbai. 100% of DA received forms part of salary for retirement benefits. a) Rs. 159400 b) Rs. 110600 c) Rs. 54000 d) Rs. 95600 2. Ashwin Agarwal’s (age 42 years) monthly salary for FY2019-20 is: Basic Salary: Rs. 48,000 Dearness Allowance1: 50% of Basic salary House Rent allowance: Rs. 12,000 Transport Allowance: Rs. 4,000 Medical Allowance : 1,250 Entertainment Allowance: Rs. 5,000 PF & Superannuation: 12% of Basic Salary Calculate his tax liability for AY2020-21. He is eligible for deduction u/s 80 C(including PF Contribution) 80,000 & paid monthly rent of Rs. 18000 per month. Assume he has no other Income. Assume he lives in Mumbai. 100% of DA received forms part of salary for retirement benefits. a) 86780 b) 90250 c) 92330 d) 118000 3. Mrs. Sumedha’s (age 42 years) monthly salary for FY2019-20 is:




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Basic Salary: Rs. 7,30,000 Dearness Allowance: 30% of Basic salary House Rent allowance: Rs. 80,000 Transport Allowance: Rs. 16000 Executive Allowance: Rs. 7,5000 Calculate her tax liability for AY2020-21. She has paid 28,000 premiums for medical Insurance of her family floater policy. Assume she has no other Income. She lives in her own house with her family. 100% of DA received forms part of salary for retirement benefits. He has 1.5 Lakh eligible investment under section 80 C. a) Rs. 44,83,710 b) Rs. 38,98,900 c) Rs. 45,17,290 d) Rs. 35,87,900 4. Anita’s ( aged 45 years) taxable income under the head salary for the Financial Year 2019-20 is Rs. 14,84,000 ( before deduction u/s 80 C). She also earns Rs. 1,80,000 as agriculture income during the same year. What is the Income Tax liability of Anita for the FY2019-20 ? Assume She made investments of Rs. 1,35,000 in all, which qualifies under section 80C. a) Rs. 272,690 b) Rs. 262,200 c) Rs. 217200 d) Rs. 280500

5. Aslam pays Rs. 28,000 annual premium for his family floater medical insurance policy and Rs.42, 000 annual premiums for his father’s (aged 62 years) medical insurance policy by cheque. What deduction is available to Aslam under/section 80 D of the Income Tax Act as per AY 2020-21.

a) Rs. 55,000 b) Rs. 70,000 c) Rs. 67,000 d) Rs. 58,000

6. Surinder had taken a loan of Rs. 6,00,000 in the year 2016-17 from a Bank to fund education expenses of B.Tech studies of his son Gautam in India. During the year 2019-20, he repaid total principal component of Rs. 35,000 and interest component of Rs. 55,000. What deduction would be available under Section 80 E of Income tax Act to him for AY2020-21?

a) Rs. 55,000 b) Rs. 35,000




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c) Rs. 90,000 d) Deduction is available on interest part on Loan taken for the purpose of self-education

7. Anurag bought his present car from his employer on 24-8-2019 for a favorable price of Rs. 2,50,000. The

employer had bought this car for Rs. 6,50,000 on 17-9-2016. What would be the tax treatment for this transaction in computation of his tax liability for A.Y. 2020-21?

a) Rs. 1,66,000 is taxable under the head of Salary b) Rs. 1,66,000 is taxable under the head of Income from other source c) No Income is added for this transaction d) Rs.82,800 is taxable under the head of salary

8. Pyare Mohan is presently staying in Mumbai in a furnished accommodation provided by his employer a public limited company. He earned following monthly salary for the FY2019-20: He has two children Rajan & Ravi.

1. Basic Salary Rs. 130,200 2. D.A (forming part of retirement

benefits) 50% of basic salary

3. Conveyance Allowance Rs. 9000 4. Executive Allowance Rs. 5000 5. Transport allowance Rs. 4,800 Special pay 20000

Further, He shall also receive a performance bonus of Rs. 860,000 from his employer for this year Compute the Value of Rent Free Accommodation for FY2019-20.(assuming the population of Mumbai city is more than 25 lakh (as per 2001 Census). Employer taken this accommodation on lease of Rs. 60,000 per month. Furniture & Fixture provided by employer is worth Rs. 12 Lakh.

a) Rs. 6,90,380 b) Rs. 6,62,880 c) Rs. 584,600 d) Rs. 5,50,380

9. Rakesh aged 57 years had worked in a Private Hospital as a senior surgeon in Chandigarh from last 27 years & retired on 30/09/2019. What would be the taxable value added in Rakesh’s income for Gratuity receipt of Rs 12 Lakh at the time of retirement. He is covered under the Payment of Gratuity Act 1972. Salary for FY2019-20 is Rs. 60,000 p.m.

a) 200000 b) 265385 c) 934615 d) 452650




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Gift taxation & Assessment 10. Anurag has received few gifts in the financial year FY2019-20 and he wants to know about the

taxation of the same. He received a gift of Rs. 63,000 from a friend and another gift of Rs. 24,000 from his neighbor. He wants to know, what is the total taxable amount from the above receipts on which Anurag will have to pay tax.

a) Rs. 63,000, as any amount received in excess of Rs. 50,000 is taxable. b) Rs. 13,000, as the amount received over the limit of Rs. 50,000 is taxable. c) Rs. 37,000, as the total amount in excess of the limit Rs. 50,000 is taxable. d) The whole amount of Rs. 87,000, as the aggregate value of gifts received from one person or

more than one person exceeds Rs. 50,000.

11. Deepak wants to gift Rs. 5 lakh to his son Veeru to buy a house. Veeru wants to know how this receipt will be treated in his hands from Income Tax perspective.

a) No tax to be paid by Veeru as it is gifted to him to buy a house. b) No tax to be paid by Veeru as gift from a father to son is tax free. c) Entire receipt will be taxable in the hands of Veeru as it is more than Rs. 50,000. d) Gift to major son is taxable

12) Rajesh had submitted return of his income to the extent of Rs. 21.50 lakh for the AY 2020-21. The

Assessing Officer has found misreporting of income of Rs. 1.50 lakh in the return submitted. What is penalty applicable u/s 270 A of the Income Tax Act, if he fails to convince the Assessing Officer? (Ignore surcharge and cess in calculations)

a) Rs. 3,00,000 b) Rs. 90,000 c) Rs. 1,50,000 d) Rs. 45,000




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Income from Capital Gains 13. Your client has in his portfolio 500 shares of an unlisted company. 100 shares were originally acquired on 1st May, 1998 for Rs. 50 each. The fair market value of the company's share was Rs. 80 each as on 1st April, 2001. 100 bonus shares were allotted on 20th November, 2016. The fair market value was Rs. 140 each as on 20th November, 2016. The remaining 300 shares were purchased on 30th May, 2014 at Rs. 350 each. Your client has got an offer on 1st July 2019 to sell the shares of the company at Rs. 500 each. You compute the capital gains in this transaction, in case the offer is accepted at the given price. The same is ______.

Cost Inflation Index (CII) for 2001-02 100 Cost Inflation Index (CII) for 2009-10 148 Cost Inflation Index (CII) for 2016-17 264 Cost Inflation Index (CII) for 2019-20 289

a) capital gain 100443 b) No capital gain applicable in case of equity share c) Capital gain 105240

14) Rajesh transferred shares of X Ltd, a listed Security to Avinash in an off-market transaction for a consideration of Rs. 30 lakh on July 1, 2019. The shares were held by him in physical form. He had purchased these shares on April 1, 2011 for Rs. 15 lakh. What will be the Long Term Capital Gains tax payable by Rajesh on the above transactions? Ignore surcharge or any other taxes, if applicable.

a) Rs. 1,50,000 b) Rs 1,28,800 c) Rs. 1,26,500 d) No tax on equity capital gain 15. Priyanka sold 500 Gold ETF units @ Rs. 1,585.27 per unit on the stock exchange on 27th October, 2019. These units were acquired in the initial offering of Gold ETFs as on 17th Oct 2017 @ Rs. 983 per unit. She asks you to advise her on the tax to be paid on such disposal of such units. The same is ___________.

a) STCG 301135 taxable at slab rates b) LTCG 30115 c) STCG 67500 taxable @ 20%




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16.

Situation: Taxation of Gold Exchange Traded Fund (Gold ETF) units Number of units 500 units Cost of acquisition (17-Oct-2006) 995 Rs. per unit

Sale Price (1-April, 2019) 2,415 Rs. per unit

CII Index for the year 2006-07 122 CII Index for the year 2019-20 272

If all the units are sold at the sale price prevailing on 1st April, 2019, what would be the post-tax gains in the transaction?

a) 7.89% b) 7.83% c) 6.30% d) 7.33%

17. Today is Feb 2020, Anurag needs more funds for his manufacturing business; meanwhile he has received a good offer to sell his second house, for Rs. 47 lakh. The brokerage charges to be incurred on sale transaction are 1.5% of sale amount. Anurag wants to know from you the amount of capital gains on this sale transaction as per AY2020-21?

He purchased this house in May 2009 for Rs. 18 lakh for investment purposes and further spent Rs. 3.15 lakh in August, 2010 on its renovation. He entered into an agreement for sale of this house for Rs. 35 lakh in March 2016 and received Rs. 2 lakh towards advance. However, the buyer could not meet his commitment and the advance was forfeited by Anurag.

Cost Inflation Index (CII) for 2009-10 148 Cost Inflation Index (CII) for 2010-11 167 Cost Inflation Index (CII) for 2019-20 289

a) Long term Capital gain of Rs. 369515 b) Long term Capital gain of Rs. 569515 c) Long term Capital gain of Rs. 443000 d) Long term Capital gain of Rs. 532280




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18.Today is 15 Feb 2020. Rajeev had invested Rs. 1 lakh to buy 200 shares of a listed company, Info Systems, in the year 2007-08. The Company had issued Bonus shares in the ratio 1:1 on 1st August 2017. Rajeev also subscribed to the Company’s Rights issue of one share for every four shares held at a price of Rs. 2250 per share in Jan 2020 Rajeev wants to generate funds for his business by selling the entire shares of Info Systems at the prevailing market price of Rs. 2500 per share through a recognized Stock exchange. What is the amount of Capital Gains for Rajeev on sale of these shares if provisions of AY 2020-21 are applicable today? Fair market value as on 31-_jan-2018 is Rs.1500)

a) Long Term Capital Gain of Rs. 1,25,000 and Short term capital gain 25,000 b) Nil c) Long Term Capital Gain of Rs. 4,00,000 and Short term capital gain 25,000 d) Long Term Capital Gain of Rs. 7,00,000 and Short term capital gain 25,000

19. Rajeev also invested Rs. 4 lakh in an Urban Agriculture land. Rajeev has received an offer to sell his agricultural land for Rs. 11 Lakh. He wants to know; which condition is not applicable to avail the exemption u/s 54 B of Income tax Act for capital gain arising on sale or transfer of agricultural land.

a) The agricultural land is sold by Rajeev in his individual capacity. b) The agricultural land has been used by Rajeev or his parents for agriculture purposes during the 2-

year period immediately preceding the date of sale. c) Rajeev will purchase another agricultural land from the amount of capital gains within a period of 2

years after the date of sale of agricultural land. d) Full consideration received from sale of agricultural land will be used in purchase of another

agricultural land otherwise proportionate capital gain would be eligible for exemption.

20. In February, 2012, Rajeev’s Father-in-Law gifted him plot of land with fair market value at the date of the gift was Rs. 3,50,000. He had himself purchased this plot in Sep 2003 for Rs. 1,50,000. Rajeev had sold this plot in July 2019 for Rs.6,50,000. An expense on sale of plot is 2% of the sale proceeds. Rajeev wants to know from you, for calculating his Income Tax liability for financial year 2019-20, what is the amount of capital gain taxable in his hands for sale of plot of land?

a) Long Term Capital Gain of Rs. 2,52,300 b) Long Term Capital Gain of Rs. 2,99,780 c) Long Term Capital Gain of Rs. 2,39,300

21. On May 2006, Hema had invested Rs. 2,00,000/- in 10,000 shares having face value of Rs. 10 per

share which is a listed company. The subsidiary company gave an offer on 15 September 2019 to buy back such shares at Rs. 93.50 per share. Hema accepted the buy-back offer and has recently got an amount of Rs. 9.35 lakh. He seeks your advice on taxability of such sum received as per provisions of AY 2020-21.




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a) 92,250 b) 73500 c) No tax applicable on Equity Capital Gain

22. Imran wants to know relative advantage of having exposure to Gold as an asset class through Gold

Exchange traded funds which can be purchased and traded as units through the demat a/c. Which of the following is not appropriate in this context?

a) In case of Investor holding Physical Gold, the purity of gold is a big concern of Investor. b) Most of the Gold ETF schemes available in India reflect International prices of Gold and insulated

from local demand supply factors c) Securities Transaction Tax (STT) is applicable on purchase & sale of Gold ETF.

23. Imran‘s father acquired his flat at Bangalore on 2003-04 for Rs. 10 lakh. After the death of Imran’s

father such house is transferred to Imran through Inheritance in FY 2009-10 & the market value at that time was Rs.18 Lakh. If he had sold this inherited house on 15-02-2020 for Rs. 60 Lakh and shift to his own house then compute the capital gain For AY 2020-21 (assuming expenses incurred on sale of house by him was Rs. 1 lakh)?

a. LTCG of Rs. 25.92 Lakh b. LTCG of Rs. 35.46 Lakh c. LTCG of Rs. 32.48 Lakh

24. Surinder purchased 7,000 Units of Equity Mutual Funds @Rs. 50 per unit on 2nd April 2019. The Equity Mutual Fund declares a dividend of Rs. 10 per unit. The record date for the dividend was 15th June 2019. Surinder sells 1,000 units on 5th March 2020 at Rs. 46 per unit. He wants to know the amount of short term capital loss he can claim in AY2020-21?

a) He gets short Term Capital Gains of Rs. 14,000 b) He gets Short Term Capital Gains of Rs. 6,000 c) He can claim Short Term Capital Loss of Rs. 4,000 d) He cannot claim any Short Term Loss for Tax computation

25. Ms. Charu has observed that in the previous 12 months a total sum of Rs. 4.80 lakh has been received on account of dividend from various equity shares. Ms. charu wants to know the taxability aspect of this payment stream. You advise that _____________

a. after payment of dividend distribution tax @17.65% (excluding surcharge & cess) by companies on the respective dividend paid, the dividend received is tax free in the hands of investor

b. tax is payable on such dividend stream at the maximum marginal rate in the hands of investor

c. after payment of dividend distribution tax @12.5% (basic rate) by companies on the respective dividend paid, the dividend received is tax free in the hands of investor

d. tax is payable at a flat rate of 15% on such dividend received by the investor




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26. A businessman sold Rs. 85 lakh value of commercial plot on 20th December 2019. These shares were acquired in April 2012 for Rs. 20 lakh. He invested Rs. 40 lakhs from these proceeds in February 2020 in his first residential house to avail benefit under Section 54F of the Income-tax Act, 1961. What approximate amount of bonds specified under Section 54EC should he purchase and by what date so as to make his capital gains liability almost ‘Nil’ towards these transactions? Cost inflation index for FY 2012-13: 200, 2019-20: 289

(a) Rs. 16.19 lakh, 30th June 2020 (b) Rs. 42.97 lakh, 30th July 2020 (c) Rs. 29.70 lakh, 19th June 2020 (d) Rs. 30.60 lakh, 31st March 2020

27. A private sector employee aged 58 has retired in March 2019 with a retirement corpus of Rs. 2.05 crore accumulated with the Company. His company is covered under the Payment of Gratuity Act,1972. He decides to commute one-third of his retirement fund, the rest being utilized by his employer to pay him a fixed immediate monthly annuity for 20 years through a pension product which gives an effective annual yield of 7.5%. If he saves maximum eligible sum under Sections 80C and 80D, what would be his tax liability for AY 2020-21? (Assume Annuity received in annuity due mode) (a) Rs. 1,51,040 (b)Rs. 1,52,510 (c) Rs. 1,62,370 (d)Rs. 2,62,630 28. An investor purchased 2,000 shares of a listed company at Rs. 125 per share on 28th December 2018. The Company declared a dividend of Rs. 8 per share, the record date was 25th March 2019. He sold 900 shares on 12th May, 2019 at a price of Rs. 113 per share and the balance on 27th January 2020 at a price of Rs. 135 per share. He had no other transactions during FY 2019-20. What is the taxability of his transactions for AY 2020-21? (a) Short term Capital Loss Rs. 10,800 (b)Short term Capital Loss Rs. 3,600 (c)Long term Capital Gain Rs. 200 (d)Long term Capital Gain Rs. 7,400




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Income from House property

29. Rajinder has given his second house at Bhuj on monthly rent of Rs. 12000. He wants to know the taxable Income from house property for AY2020-21. The Municipal value of the house is Rs. 90,000, Fair rent Rs. 1,40,000, Standard rent Rs. 1,20,000. The house was vacant for one month during the previous year 2019-20 and the rent has not changed since then. Municipal taxes paid in previous year Rs. 3500.

a) Rs. 1,40,500 b) Rs. 1,28,550 c) Rs. 89,950 d) Rs. 1,32,000

30. Radha had taken a housing loan of Rs. 20 lakh at an interest rate of 9% p.a. on 1st December, 2010 for

a term of 15 years. The first EMI was paid on 1st January, 2011 and thereafter on 1st of every month regularly. Radha wants to know the interest portion allowable as deduction under section 24 of the Income Tax Act for the AY 2020-21.

a) 104910 b) 103872 c) 150000 d) 119520

31. The construction of Surinder’s house was completed on 31st March 2019. The bank started recovery

of EMI’s after that, the first EMI recovered on 1st May 2019. Prior to 31st March 2019, Surinder paid only the interest on his loan which was disbursed in full by the bank on 1st Aug 2017, when the construction started. He wants to know the interest portion allowable as deduction under section 24 of the Income Tax Act for the AY 2020-21.The Principal amount of loan is Rs. 6,00,000 taken on 1st Aug 2017.The applicable rate of Interest is Rs. 8.5% per annum fixed for a term of 20 years from the date of construction completed.

a) 50542 b) 67542 c) 68530 d) 45690

32. A trust is created by a son, the Settlor, for the survival expenses of his retired parents each having equal beneficial interest. Both husband and wife have separate fixed pension of Rs. 35,000 per month and Rs. 30,000 per month, respectively. The trust property has generated a net annual value of Rs. 5.12 lakh in the financial year 2019-20. The trustee as well as the Settlor is in the 30% tax bracket. Find the tax payable by the trustee as representative assessee. (a) Rs. 79,100 (b) Rs. 46,760 (c)Rs. 1,01,350 (d) Rs. 72,180




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33. What is not correct about SGB’s? a. Investor can take loan against SGB b. Pre-mature redemption of the Bond is permitted from fifth year of the date of issue on the interest payment dates. c. Proceeds from SGB at maturity are exempt from tax. d. These bands are tradeable & bought/sold@ premium/discount to their face value in the market immediately after the issue date. e. Maturity period is 8 years from the investment date f. Interest coupon is taxable under head Income from other source. g. SGB’s coupon rate fixed at the time of issue by RBI h. Individual investment limit: Minimum investment is 1 gram and maximum investment 4 Kg for an Individual. i. No Indexation allowed in case of Long term capital gain if bonds sold before maturity date.




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Estate Planning

What is Estate Planning ?

Estate planning refers to the organized approach to managing the accumulated assets of a person in the interest of the intended beneficiaries. Wealth may be accumulated with a specific purpose of being passed on to heirs, to charity, or to any other intended purpose. Without formal structures that ensure that these purposes are met, there could be disputes, conflicting claims, legal battles, avoidable taxes and unstructured pay-offs that may not be in the best interest of the beneficiaries.

Estate planning covers the structural, financial, legal and tax aspects of managing wealth in the interest of the intended beneficiaries.

The term ‘estate’ includes all assets and liabilities belonging to a person at the time of their death. This may include assets as well as claims a deceased is entitled to receive or pay. The term estate is used for assets whose legal owner has deceased, but have not been passed on to the beneficiaries and other claimants. Once transferred, the estate becomes the assets of the beneficiary who has received the legal ownership. Estate can also be passed on to a trust and managed by trustees, in which case ownership is with a distinct entity, but periodical benefits from the estate is passed on to beneficiaries

What inheritance laws apply in India?

No uniform codified inheritance laws apply in India.

The Constitution of India provides freedom of conscience (i.e., religious faith as a fundamental right). Family law has always been a part of religious law. This means that no uniform code for civil law exists in India, even though it has been put into the Directive Principles of State Policy of the Constitution of India. Since laws of marriage and succession are the most intricate amongst the religious laws, inheritance issues in India are very complicated.

Different religious groups in India subscribe to different laws. Hindus have their own codified law (Hindu Succession Act), Muslims have their own textual law of inheritance (Islamic Law on Succession), Parsees come under the Indian Succession Act, as do Christians, as well as others (e.g. spouses with different religions married under The Indian Marriage Act).

The civil court of the district deals with all matters relating to inheritance.

Inheritance issues are dealt with by the principal civil court of original jurisdiction (district judge’s court) where the property lies, or where the deceased used to live in India before death, or before departing the country.

As per Hindu Succession Act, 1956 Order of intestate succession

The following is an outline of the orders of succession and the shares of inheritance for heirs in different groups in India:




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1. If the deceased is a Hindu male (including Buddhists, Sikh, Jain, and all those who are not Christian, Muslim or Parsi):

Class I heirs of a male Hindu who shall simultaneously inherit are:

Mother being alive (1 share)

1. Widow (1 share)

2. Living sons (1 share each)

3. Living daughters (1 share each)

4. Predeceased son having the following relations (1 share)

a. widow

b. sons

c. Daughters – each to be equally divided.

If a predeceased son of this predeceased son leaves a widow, the living sons and living daughters each shall equally share the share of the predeceased son of the predeceased son who has one share with living sons and daughters. Predeceased daughter (1 share) to be equally shared by sons and daughters of the predeceased daughter.

In case there is none in the class I schedule, the property shall go to the class II-based order. The earlier order is preferred over the later, (i.e. if an earlier order is present, the later orders would not inherit):

Order I: Father (whole in the absence of anybody in class I) Order II: Son’s daughter’s son; son’s daughter’s daughter, Brother, Sister ( all in equal proportion) Order III: Daughter’s son’s son, daughter’s son’s daughter, daughter’s daughter’s son, daughter’s daughter’s daughter (equally) Order IV: Brother’s son, brother’s daughter, sister’s son and sister’s daughter Order V: Father’s father, Father’s mother (equally) Order VI: Father’s widow, brother’s widow Order VII: Father’s brother, Father’s sister Order VIII: Mother’s father, mother’s mother Order IX: Mother’s brother, mother’s sister

2. If the deceased is a female Hindu dying intestate: -

Entry A: Sons (1 share each), Daughters (1 share each), husband (1 share), son and daughter of predeceased son (equally together 1 share), son and daughter of predeceased daughter (equally together I share).

Entry B: Heirs of Husband: Entry C: Father and Mother Entry D: Father’s heir Entry E: Heirs of the mother




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Elements of Estate Planning Estate planning involves the following broad set of activities:

a) Identifying the beneficiaries and their claim to the estate through a comprehensive documentation such as the legal Will.

b) Creating tax-efficient structures such as trusts to manage the estate and make periodic payouts to beneficiaries.

c) Creating organizational structures including trustees, executors, guardians, power of attorney to perform identified functions in administering, protecting and managing the estate.

Wills

“Will” is defined in Section 2(h) of the Indian Succession Act 1925 to mean the “legal declaration of the intention of the testator with respect to his property, which he desires to be carried into effect after his death.”

The person making the will is the testator, and his rights extend to what are legally his own. The will comes into effect only after the death of the testator.

The person who is named in a will to receive a portion of the deceased person’s estate is known as a legatee.

The person named in the will to administer the estate of the deceased person is termed as an Executor.

a. Essential Features of a Will

A testator can only dispose-off what he owns and what is essentially legally transferable.

Example: Arvind and his wife are joint owners of their house, funded by a joint loan. Arvind wills the house to his only son, who asks his mother to vacate the house after Arvind’s death. Arvind’s wife can contest this will on the grounds that she is the joint legal owner of the house, having paid valid consideration. Arvind cannot bequeath to his son, what he does not own.

A testator can change the contents of the will any number of times, before his death. Such changes to the will are called ‘Codicils’. A will can also be revoked by the testator at any time before his death.

A will can only be made by a person competent to make it. A minor or a person of unsound mind cannot make a will.

Only using the words ‘will’ without making reference to disposal of property upon death of testator is not a will.

A will has to be written and signed in the presence of two witnesses. However, subject to certain conditions, persons working in the armed forces can make an oral Will.




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b. Contents of a Will:

A will must have the name and address of the testator and a statement that the will is being made voluntarily. The beneficiaries under the will must be clearly listed as must the property that is being bequeathed. The will has an executor. It must be signed by the testator and attested by two witnesses.

A will has to be unambiguous and certain as to its intent to bequeath. To avoid disputes only a single copy of latest valid will should be in existence, witnesses should sign in the presence of each other, a residuary clause that leaves all assets that remain uncovered in the bequests to an identified beneficiary should be included in the will and a statement stating that the current will revokes all previous bequests of any nature should be included in the will.

c. Registration of Wills:

It is not compulsory to register a will. However, it is usually a good practice to register a will. A registered will cannot ordinarily be tampered with, destroyed, mutilated, lost or stolen. If a will is registered, no person can examine the will and copy the contents without an express permission in writing of the testator.

d. Probate:

Probate is defined in section 2 (f) of the Indian Succession Act to mean the copy of a will certified under the seal of a court or competent jurisdiction. A probate certifies that a particular will was proved on a certain date and is given attaching copy of the will of which probate has been granted.




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Nomination Nomination is the right conferred upon the holder of an investment product to appoint the person entitled to receive the monies in case of the death. A nomination is seen as a formal bequest authorized by the holder of the asset, though in the event of a dispute the nominee’s position is reduced to being the trustee of the bequest, the final owners being decided according to the applicable laws of succession.

Only an individual can nominate. Non-individuals including corporate bodies, partnership firms, trusts, Karta’s of Hindu Undivided Families (HUFs) and power of attorney holders, cannot nominate. Nomination can be done either at the time of making the investment or entering into an insurance contract or subsequently at any time. Nominations can be modified any number of times.

Nominee can be an individual, company or trust, depending on the terms of investment or asset. A minor can be a nominee, but a guardian will have to be named. Nominations to NRIs will be honored subject to repatriation rules. Multiple nominees may be allowed, with percentage of interest defined for each nominee.

Different rules for nomination apply for different types of assets The purpose of nomination is simplification of payment process in the event of the death of the holder

and not the equitable distribution of estate. Payment to nominee is a valid discharge in case of all financial products. The onus of proving any rights

to legacy of the investment so transmitted is on those that contest such transmission. A will supersedes a nomination, but the company or mutual fund can still make payment of proceeds to the nominees. The nominee is not a legatee or beneficiary under the Indian Succession Act. The nominee takes the amount subject to any claim or right of the owners/heirs or other persons. The nominee may only receive the proceeds, but title to the assets is not absolute.




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Private Trusts A trust is said to be an instrument of safeguarding the interests of beneficiaries especially when the beneficiaries are minor and not capable of protecting their interest. The term 'trust' essentially means that the donor divests himself of all the beneficial interest in the property for the benefit of the beneficiaries. A private trust is governed by the Indian Trusts Act, 1882 and could either be structured as revocable or irrevocable. The type of trust you will choose to create for your family will depend on your family's needs and intentions.

The person who declares the confidence is called the Author of the Trust. In other words, settlor is a person who settles property on trust law for the benefit of beneficiaries.

The person who accepts the confidence is called the Trustee. Trustee is a person or

a firm that holds or administers property or assets for the benefit of a third party. Trustee has obligation to pay tax in the capacity of a representative assessee.

Beneficiary: the person for whose benefit the confidence is accepted is called the

Beneficiary. A registered document called as trust deed is necessary to set up trust and should

be registered with the Registrar. The deed should be executed on a stamp paper

The above terms can be easily understood with an example: - Mr. A wants to pass his property to Mr. C for the benefit of his minor granddaughter. Mr. A passes his property to C, because he reposes (has) confidence on C. In this case, Mr. A is author of trust, Mr. C is trustee, Minor Granddaughter is beneficiary and property is Trust Property. A couple of examples: Mr. A, promoter of a renowned listed company has recently settled his shareholding in a revocable trust, mainly because it serves a two-fold purpose - he is able to retain control over the company shareholding settled into the trust and at the same time the shares will pass on to the intended beneficiaries after his demise. Mrs. B, a professional, who has substantial assets held in shareholding received through ESOPs, also has settled his assets into a revocable trust. He wants to ensure that his two children and spouse are protected and a scenario in which he is incapacitated is catered to in the most hassle-free manner.




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Under a revocable trust, the settlor of the trust, during his lifetime, has the power to revoke the trust funds settled by him and he may also be added as a beneficiary and reap the benefits of his own assets under the trust. A revocable trust offers flexibility to the settlor to have complete control over his assets and at the same time is an effective tool for consolidation of assets. On the other hand, in an irrevocable trust, once the settlor has settled his assets, he cannot revoke the same. In an irrevocable trust, no control or power is retained in the hands of the settlor and, if structured appropriately, it could ensure that settled assets are ring-fenced or protected. Income from private trusts is available to specified beneficiaries and not the public at large. Private trusts are of two basic types for Income tax purposes: • Specific trusts– where the individual shares of the beneficiaries are known and ascertainable for e.g. Mr. X creates a trust for his 5 sons and the share of each son is mentioned in the deed as 20% each, then such trust is known as specific trust. • Discretionary Trust: In this no individual shares of the beneficiaries are mentioned in the deed and income is distributed to them on the “discretion” of the trustee. II. Advantages of Trust form of Estate Planning: Trust creation helps in bypassing probate process Trust creation helps in safeguarding interests of family members, especially those with special needs Conditions can be attached to assets gifted to a Trust, for example, on attaining majority by

beneficiary Future capital gains tax on assets transferred to trust could be lower

Taxation of private trusts:

In the case of private trusts, if the individual shares of the beneficiaries are ascertainable, they are included in the individual taxable incomes, the tax assessment being made either directly on the beneficiary or on the trustee as a representative of the beneficiary. When the individual shares of the beneficiaries are indeterminate (i.e., discretionary trust), the entire income is taxed in the hands of the trustees, in most cases at the maximum marginal rate applicable to individuals.

In case of Revocable Trusts : The Trustee is the legal owner of property transferred to a Revocable Living Trust. However, the income of a Revocable Living Trust is taxed in the hands of the Settler. Sec 161 (1A) stipulates that a trust, specific or discretionary, will be taxed at maximum marginal rate if its income consists of or includes profits & gain from business. Exception : Maximum Marginal Rate will not apply if a trust has been declared by way of a will from which business income is derived by any person and is exclusively for the benefit of any relative dependent on him and also such trust is the only trust so declared by him.




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Example : There are two beneficiaries (Age above 40) with an equal share in an Irrevocable specific private trust . The beneficiary may have their own respective incomes. The trust income is distributed in the specified ratios to each of them. One beneficiary after accounting for trust income remains in the 10% bracket, while the other jumps to the 20% bracket. The individual tax amounts on only the trust income allocated to each of the beneficiaries is calculated in their respective tax slabs. These individual tax amounts are then added to compute the tax payable by the trustee as representative assessee. Public Trusts Public trust is express or constructive trust for either a public religious or charitable purpose or both. There is general misconception that the income of trust enjoys total freedom from tax. Unconditionally 15% of the Income of these charitable trust/societies is exempt from tax. However, the remaining 85% of Income must be used for the charitable purpose defined in their constitution. The beneficiaries in charitable trust must not be able to demand or claim any benefit. Hindu Undivided Families Hindu undivided family (HUF) is an Indian structure where the assets belonging to a family is managed centrally. To form a HUF, ancestral property or specific income that can be attributable to the HUF and not an individual, should be in existence to begin with. Other assets including investments can then be acquired by the HUF, using the funds at its disposal. A HUF is defined under the Hindu Law as a family that consists of all persons lineally descended from a common ancestor, including wives and unmarried daughters. The Karta is the head of the HUF and has to be the senior-most male member of the family, unless he gives up his right in favor of another senior male member of the family. The male members of the HUF are called co-parceners and female members are called members. For purposes of taxation, an HUF is treated like an individual investor, provided it has at least three co-parceners. The income of the HUF should accrue from its own assets. Any income arising from assets transferred by a member or co-parcener will be clubbed to their respective incomes and taxed as such. They will not be treated as the income of the HUF. HUF – Mitakshra School (Applicable in all states Except Bengal, Assam & Orrisa) A HUF Consisted of Coparceners i.e. the sons, grandsons & great grandsons of the holders of the joint property. Female members were not coparceners and had no right to demand partition. The Wives and unmarried daughters entitled to maintenance out of their family property. The senior most male member of the family usually managed the affairs of the family as Karta. However, the wife of a Karta had an equal share with all the coparceners (in case of Karta expired). The Hindu Succession Act, 1956 has been amended w.e.f. 6.9.2005 mainly Sec 6, accordingly, - A daughter of a coparcener shall by birth become a coparcener in the HUF in her own right in the same manner as the son. She has the same rights in the coparcenary property as she would have had if she had




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been a son. Such a right is available only to daughters and not to other members of the family such as mother, wives & daughter in law. For Clarity Let us take the instance of HUF of X married to Y. They have a son (S) and daughter (D). The son has two children A and B. The daughter (D) has two children E and F. This means that there are 7 coparceners. The Wives are certainly members of HUF but they are not the coparceners. Husband of (D) is not a member of HUF. Now suppose there is a partition: the property will get divided differently in different situations:

1. All are Alive - 1/3rd to X, S and D 2. X has expired – 1/3rd to Y, S and D 3. S has expired – 1/3 to X and D and 1/6 to A and B 4. X and S have expired - 1/3 to Y and D and 1/6 to A and B 5. X and Y have expired - 1/2 to S and D 6. X, Y and S have expired - 1/2 to D and ¼ to A and B 7. X, Y and D have expired - 1/2 to S and ¼ to E and F

Any distribution of Capital assets to the members on the partition of HUF is not regarded as transfer & no capital gain applicable. Although the 2005 amendment provides equal rights to daughters in the coparcenary as compared to the sons, an important question was still left unanswered - Can women or daughters be allowed to become managers or karta of the Hindu Undivided Family? The landmark Delhi High Court judgement in Mrs. Sujata Sharma v Shri Manu Gupta. has, after the 2005 amendment to Hindu Succession Act, 1956, brought the next step to realising equality of women in the Hindu Undivided Family. The court found that while females have equal rights to HUF property (post HSA), they also have the right to manage the same property as Karta. Also, the court found no restrictions regarding a female Karta in Section 6, Hindu Succession Act. Thus, after demise of the father in a HUF, if the eldest is a daughter then she becomes the Karta of that same HUF, with the mother and siblings (if any) as members of the HUF. Hence, married or unmarried daughters may not only claim coparcenary in HUF property but may also claim rights to manage the same HUF property as Karta, provided they are the eldest. This means that just as a son can be a Karta, by virtue of being born the eldest, a daughter can also be a Karta given that she was born eldest. Also, even after being married a daughter retains her right to coparcenary and also the right to be Karta. In fact, a woman may even be a de facto Karta in the family where she marries, provided that she is a widow and is the only major in the family she married into. With this judgement the equal rights of daughters in their HUF have been fully realized. Daughters would have the same rights and liabilities as sons regarding the HUF property for all means and purposes.




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Estate Planning

1) Sham wants to know according to which Act his father’s estate would be distributed in case he dies Intestate. a. Hindu Succession Act, 1956, under which people belonging to Sikh, Hindu, Buddhist, Jain religion are

covered b. Hindu Succession Act, 1956, under which people belonging to Sikh, Hindu, Parsi & Jain religion are covered c. Indian Succession Act, 1925, under which people belonging to Sikh, Hindu, Buddhist, Jain & Parsi religion

are covered d. Indian Succession Act, 1925, under which people belonging to Sikh, Hindu, Jain, Parsi, Christian & Jews

religion are covered 2. Irawati wants to create a private trust in the name of her children. According to you, which of the following are true in case of a private trust? (I) A trustee shall be any known person capable of holding property (II) A trust has to be declared by a non – testamentary instrument in writing, signed and registered or by the will of the author of the trust or of the trustee in case of an immovable property (III) A trustee would be taxed in his hands in a representative capacity where the beneficiary is a minor, lunatic or idiot or specifically entitled to receive the income from the trust (IV) The author of the trust can be the trustee himself

a. (III) and (IV) b. (II) and (III) c. (II), (III) and (IV) d. (I), (II) and (IV)

3. Ravi, who is a Hindu, wants to know according to which Act his father’s estate would be distributed in case he dies Intestate.

a. Hindu Succession Act, 1956 b. Indian Contract Act c. Indian Succession Act, 1925 d. Transfer of Property Act

4. Balchandar Pathak and Manorama married couple has no estate plan till date. Their family constitutes three sons, two daughters in which one of the daughters is married. As per prevailing Hindu Succession law in India, how much share is their eldest son eligible to get from the estate of Balchandar in case he dies intestate? a. One sixth (three sons + 2 daughters + 1 wife)




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b. One fifth c. One third d. All Property rights goes to Manorama and after her death Devendra will would get his share of the

Property 5. Devendra’s father-in-law is a well-established businessman and Sandhya is their only child. He wants to include Devendra as a member in their HUF. Is it possible?

a. Yes b. No c. Yes, but with prior permission from IT department d. Yes, but first Davendra’s father-in-law should prepare a non-revocable Will in favour of

Devendra 6. Somya wants to adopt a child and part with some of her properties in favour of the child. She wants to plan her Estate as she will remain a spinster throughout her life. But she is afraid that after her death her brother may challenge such transfer. You would advise her __________.

a. not to do any Estate Planning b. to prepare a WILL c. to create a Registered Living Trust where the child would be the beneficiary d. to prepare a Power of Attorney in favour of her father to manage her property for the benefit

of the Child 7. Umang’s brother in law is an NRI. He wants Umang to make some investments on his behalf whenever the right opportunity arises. You suggest:

a. Umang’s brother in law should prepare a Notarized affidavit in Umang’s favour. b. Umang’s brother in law should prepare a Special Power of Attorney specifying transactions

that can be carried out by Umang. c. Umang should prepare a General Power of Attorney that gives him the right to do transactions

on behalf of his brother in law. d. Umang should not get into such an arrangement due to complex tax laws related to NRI

Investments. 8. Umang has not done any Estate Planning as of now. Even his father has not prepared any Estate Planning documents. As Umang is the only son of his parents, along with his 3 sisters, what is most suitable for him? a. Umang’s father should first prepare his Will and on the basis of that Will Umang should prepare his own

Will. b. Umang should prepare his own Will without waiting for his father’s Will. c. There is no need for any Estate Planning as Umang is the only son of his parents.




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d. Umang should prepare his Will by including his father’s property but with an inbuilt provision for his sisters on account of that property.

9. Recently in an unfortunate event, one of Surinder’s brothers died in a road accident. He was a

bachelor and he died intestate. Surinder’s parents were living with his deceased brother. Apart from Surinder there are three other siblings of the deceased. He wants to know the applicable order of priority as per Hindu Succession Act for the disposition of his deceased brother’s property.

a) Both parents will get the priority over all siblings of Surinder including Surinder himself. b) All siblings of Surinder will get the priority over their parents. c) Surinder’s mother will get priority over others. d) All of them will have equal right over the property of the deceased

10. Narinder wants to make a Will and understand its procedures; you explained that the ________ is the person responsible for offering the Will for probate.

a) Testator b) Executor c) Lawyer d) Beneficiary

11. Narinder’s father has made a Will deed for distribution of his assets. Narinder discusses with you

regarding Probate process, as per you which is not a feature of Probate process?

a) The assets are gathered, applied to pay debts, taxes and expenses of administration and distribute to those designated as beneficiaries in the Will.

b) Executor or Personal Representative named in the Will is in charge of this process. c) All legal heirs will receive notices from the court to file objections. d) The court will give orders to distribute the assets to the heirs as per intestate succession Act.

12. Ananya, aged 42 years is a divorcee. She has two children; daughter Reeta aged 13 years and son

Gourav aged 11 years. You have advised Ananya to do Estate Planning. According to you what should be the most preferred way for her Estate Planning?

a) She should devolve all of her personal properties to her personal HUF. b) She should prepare a Will naming her children as the sole beneficiaries in the same. c) She should prepare a Will naming her children as the sole beneficiaries as well as designate

one or more guardians with their prior consent. d) She should transfer all of her existing properties in the names of her children and nominate

her both children equally in all her legal documents




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13. Devang would like to know how the property would devolve if a person dies intestate and also the importance of Estate Planning. According to you, which of the following is not appropriate in Estate distribution when a person dies intestate?

a) A Succession Certificate is applicable when there is no valid Will. b) Legal Heirs will apply to the civil court for grant of a Succession Certificate. c) Law of Inheritance is applicable in Estate distribution. d) Legal Heirs get Estate rights on the basis of probate




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Financial Planner Code of Ethics & Professional Responsibility

FPSB India adopted the Code of Ethics to establish the highest principles and standards. These Principles are general statements expressing the ethical and professional ideals CFP Certificants are expected to display in their professional activities.

Rules that Relate to the Code of Ethic of Integrity

CLIENT FIRST – Rules that relate to the Principle of Client First

Placing the client’s interests first is a hallmark of professionalism, requiring the Financial Planning professional to act honestly and not place personal gain or advantage before the client’s interests.

Rule 101

A CFPCM Certificant shall at all times place the interest of the client first.

Rule 102

The CFPCM Certificant shall at all times place the interest of the client’s first, followed by the best interest of employer or organization while rendering professional advice.

INTEGRITY – Rules that relate to the Principle of Integrity

Integrity requires the quality of being open and honest; frankness (candour) in all professional matters. Financial Planning professionals are placed in positions of trust by clients, and the ultimate source of that trust is the Financial Planning professional’s personal integrity. Allowance can be made for legitimate differences of opinion, but integrity cannot co-exist with deceit or subordination of one’s principles. Integrity requires the Financial Planning professional to observe both the letter and the spirit of the Code of Ethics.

Rule 201

A CFPCM Certificant shall not solicit clients through false or misleading communications or advertisements:

(a) Misleading Advertising: A CFPCM Certificant shall not make a false or misleading communication about the size, scope or areas of competence of the CFPCM Certificant’s practice or of any organization with which the CFPCM Certificant is associated; and

(b) Promotional Activities: In promotional activities, a CFPCM Certificant shall not make materially false or misleading communications orally or in writing to the public or create unjustified expectations regarding matters relating to financial planning or the professional activities and competence of the CFPCM Certificant




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or of any organization. The term “promotional activities” includes, but is not limited to, speeches, interviews, books, printed or electronic publications, seminars, radio and television shows, and video cassettes; and

(c) Representation of Authority: A CFPCM Certificant shall not give the impression that one is representing the views of an individual or particular group unless the CFPCM Certificant has been authorized to do so. Personal opinions shall be clearly identified as such.

Rule 202

In the course of professional and business activities, a CFPCM Certificant shall not engage in conduct involving dishonesty, fraud, deceit or misrepresentation, or knowingly make a false or misleading statement to a client, employer, employee, professional colleague, governmental or other regulatory body or official, or any other person or entity.

Rule 203

A CFPCM Certificant has the following responsibilities regarding funds and/or other property of clients:

(a) In exercising custody of or discretionary authority over client funds or other property, a CFPCM Certificant shall act only in accordance with the authority set forth in the governing legal instrument (e.g., special power of attorney, trust, letters testamentary, etc.); and

(b) A CFPCM Certificant shall identify and keep complete records of all funds or other property of a client in the custody of or under the discretionary authority of the CFPCM Certificant; and

(c) Upon receiving funds or other property of a client, a CFPCM Certificant shall promptly or as otherwise permitted by law or provided by agreement with the client, deliver to the client or third party any funds or other property which the client or third party is entitled to receive and, upon request by the client, render a full accounting regarding such funds or other property; and

(d) A CFPCM Certificant shall not commingle client funds or other property with a CFPCM Certificant’s personal funds and/ or other property or the funds and/or other property of a CFPCM Certificant’s firm. Commingling one or more client’s funds or other property together is permitted, subject to compliance with applicable legal requirements and provided accurate records are maintained for each client’s funds or other property; and

(e) A CFPCM Certificant, who takes custody of all or any part of a client’s assets for investment purposes, shall do so with the care required of a fiduciary.




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OBJECTIVITY – Rules that relate to the Principle of Objectivity

Objectivity requires intellectual honesty and impartiality. Regardless of the services delivered or the capacity in which a Financial Planning professional functions, objectivity requires Financial Planning professionals to ensure the integrity of their work, manage conflicts and exercise sound professional judgment.

Rule 301

A CFPCM Certificant shall not mislead or omit any financial records or material or fact while rendering professional advice for self-interest.

Rule 302

At the earliest point in the relationship, a CFPCM Certificant shall disclose in writing to the client if the CFPCM Certificant is only authorized to sell or advise on a restricted range of products, and any other limitation of their capacity to serve the client.

Rule 303

In the provision of any written recommendation contained in a financial plan, a financial planning practitioner shall make timely written disclosure of all material information prior to entering into a professional relationship. Disclosures that include the following information are considered to be in compliance with this Rule:

(a) An accurate and understandable statement of compensation, which in detail discloses the source(s) and any contingencies or other aspects material to the fee and/or commission arrangement. Any pecuniary or non-pecuniary benefit whether direct or indirect, received or receivable by the CFPCM Certificant, the CFPCM Certificant’s firm, or an associate in connection with the financial planning service should be fully disclosed, any other costs borne by the client should they accept all or part of the recommendation. The disclosures of the particulars may be made either in percentage terms or in monetary terms and any estimates made shall be clearly identified as such and shall be based on reasonable assumptions. Referral fees, if any, shall be fully disclosed; and

(b) A statement describing the nature and extent of any significant financial relationships or connections a CFPCM Certificant has with product suppliers and the fees or commissions resulting from such relationships; and

(c) Any information that the client might reasonably want to know in establishing the scope and nature of the relationship, including, but not limited to information about the CFP professional’s areas of expertise; and

(d) A general summary of likely conflicts of interest between the client and the CFP professional, the CFP professional’s employer or any affiliates or third parties, including, but not limited to, information about any




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familial, contractual or agency relationship of the CFP professional or the CFP professional’s employer that has a potential to materially affect the relationship with the client;

(e) Contact information for the CFP professional and, if applicable, the CFP professional’s employer.

Rule 304

If financial planning services are provided orally, a CFPCM Certificant must disclose orally to the client the particulars described in Rule 303.

Rule 305

Should conflict(s) of interest(s) develop after a professional relationship has been commenced, a CFPCM Certificant shall promptly disclose in writing the conflict(s) of interest(s) to the client. The CFPCM Certificant must be able to demonstrate that the client was made aware of any actual or potential conflict of interest.

Rule 306

In addition to the disclosure by financial planning practitioners regarding sources of compensation required under Rule 303, such disclosure shall be made annually thereafter for ongoing clients. The annual disclosure requirement may be satisfied by offering to provide clients with the disclosure called for by Rule 303.

Rule 307

A CFP professional shall not borrow money from a client. This Rule does not apply when:

(a) The client is a member of the CFP professional’s immediate family;

(b) The client is an institution in the business of lending money and the borrowing is unrelated to the professional services performed by the CFP professional.

Rule 308

A CFP professional shall not lend money to a client. This Rule does not apply when:

(a) The client is a member of the CFP professional’s immediate family;

(b) The CFP professional is an employee of an institution in the business of lending money and the money lent is that of the institution, not the CFP professional.

COMPETENCE – Rules that relate to the Principle of Competence




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Competence requires attaining and maintaining an adequate level of abilities, skills and knowledge in the provision of professional services. Competence also includes the wisdom to recognize one’s own limitations and when consultation with other professionals is appropriate or referral to other professionals necessary. Competence requires the Financial Planning professional to make a continuing commitment to learning and professional improvement.

Rule 401

A CFPCM Certificant shall be updated of developments in its areas of specialization and participate in continuing education throughout the professional career to improve professional competence. As a distinct part of this requirement, a CFPCM Certificant shall satisfy all continuing professional development requirements established for CFPCM Certificants by FPSB India from time to time.

Rule 402

A CFPCM Certificant shall offer advice only in those areas in which the CFPCM Certificant has competence. In areas where the CFPCM Certificant is not professionally competent, the CFPCM Certificant shall seek the counsel of qualified individuals and/or refer clients to such professionals.

Rule 403

A CFPCM Certificant shall have reasonable and appropriate standards for the appointment of Representatives.

FAIRNESS – Rules that relate to the Principle of Fairness

Fairness requires providing clients what they are due, owed or should expect from a professional relationship, and includes honesty and disclosure of material conflicts of interest. It involves managing one’s own feelings, prejudices and desires to achieve a proper balance of interests. Fairness is treating others in the same manner that you would want to be treated.

Rule 501

In rendering professional services, a CFPCM Certificant shall ensure that prospective clients are clearly informed in writing about:

(a) The identity of the Company responsible for the advice and, if the advice is provided through a Representative, the identity of the Representative;

(b) The nature of services offered;

(c) The information required by all laws applicable to the relationship in a manner complying with such laws;

(d) Access to internal and external complaint handling mechanisms.




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Rule 502

A CFPCM Certificant’s compensation shall be fair and reasonable on the basis of level of competency and recognition.

Rule 503

Prior to establishing a client relationship, and consistent with the confidentiality requirements of Rule 601, a CFPCM Certificant may provide references which may include recommendations from present and/or former clients.

Rule 504

A CFPCM Certificant shall clearly disclose to all prospective clients the capacity in which they are able to provide financial planning services.

Rule 505

Whether a CFPCM Certificant is employed by a financial planning firm, an investment institution, or serves as an agent for such an organization, or is self-employed, all CFPCM Certificants shall adhere to the same standards of disclosure and service.

Rule 506

Ensure supervision and consistency in the level of services being procured from other subject matter experts or professionals.

Rule 507

A CFPCM Certificant shall:

(a) Advise the CFPCM Certificant’s employer of outside affiliations which reasonably may compromise service to an employer; and

(b) Provide timely notice to the employer and clients, unless precluded by contractual obligation, in the event of change of employment or FPSB India licensing status.

Rule 508




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A CFPCM Certificant doing business as a partner or principal of a financial services firm owes to the CFPCM Certificant’s partners or co-owners a responsibility to act in good faith. This includes, but is not limited to, disclosure of relevant and material financial information while in business together.

Rule 509

A CFPCM Certificant shall join a financial planning firm as a partner or principal only on the basis of mutual disclosure of relevant and material information regarding credentials, competence, experience, licensing and/or legal status, and financial stability of the parties involved.

Rule 510

A CFPCM Certificant who is a partner or co-owner of a financial services firm who elects to withdraw from the firm shall do so in compliance with any applicable agreement, and shall deal with his or her business interest in a fair and equitable manner.

Rule 511

A CFPCM Certificant shall inform his or her employer, partners or co-owners of compensation or other benefit arrangements in connection with his or her services to clients, which are in addition to compensation from the employer, partners or co-owners for such services.

Rule 512

If a CFPCM Certificant enters into a business transaction with a client, the transaction shall be on terms that are fair and reasonable to the client.

Rule 513

A CFPCM Certificant shall clearly identify with the client the assets, if any, over which the CFPCM Certificant will take custody, exercise investment discretion, or exercise supervision.

CONFIDENTIALTY – Rules that relate to the Principle of Confidentiality

Confidentiality requires client information to be protected and maintained in such a manner that allows access only to those who are authorized. A relationship of trust and confidence with the client can only be built on the understanding that the client’s information will not be disclosed inappropriately

Rule 601




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A CFPCM Certificant shall not reveal - or use for his or her own benefit - without the client’s consent, any personally identifiable information relating to the client relationship or the affairs of the client, except and to the extent disclosure or use is reasonably necessary:

(a) To establish an advisory or brokerage account, to effect a transaction for the client, or as otherwise impliedly authorized in order to carry out the client engagement; or

(b) To comply with legal requirements or legal process; or

(c) To defend the CFPCM Certificant against charges of wrongdoing; or

(d) In connection with a civil dispute between the CFPCM Certificant and the client.

For purposes of this rule, the proscribed use of client information is improper whether or not it actually causes harm to the client.

Rule 602

A CFPCM Certificant shall maintain the same standards of confidentiality to employers as to clients.

Rule 603

A CFPCM Certificant doing business as a partner or principal of a financial services firm owes to the co-owners a responsibility to act in good faith. This includes, but is not limited to, adherence to reasonable expectations of confidentiality both while in business together and thereafter.

Rule 604

Unless compelled to by law, or as required to fulfill a legal obligation, any CFPCM Certificant who by reason of their membership in the FPSB India is exposed to, learns of or has access to information and knowledge concerning the FPSB India and/or CFPCM Certificants must keep confidential all such information and knowledge and is not entitled to communicate or divulge that information or knowledge or any part thereof.

Rule 605

A CFPCM Certificant must, when requested to do so by a client, give to the client or another person authorized by the client, any original document (not photocopies) related to the provision of financial planning advice for which the client has paid or will pay for. This does not include documents which have been prepared or received by the CFPCM Certificant in undertaking the advisory task, such as internal notes, memoranda, quotes or other working documents.

Rule 606




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A CFPCM Certificant shall take prudent steps to protect the security of the client’s information and property, including the security of stored information, whether physically or electronically, that is within the CFPCM Certificant’s control.

PROFESSIONALISM – Rules that relate to the Principle of Professionalism

Professionalism requires behaving with dignity and showing respect and courtesy to clients, fellow professionals, and others in business-related activities, and complying with appropriate rules, regulations and professional requirements. Professionalism requires the Financial Planning professional, individually and in cooperation with peers, to enhance and maintain the profession’s public image and its ability to serve the public interest.

Rule 701

A CFPCM Certificant shall show respect for other financial planning professionals, and related occupational groups, by engaging in fair and honorable competitive practices.

Rule 702

A CFPCM Certificant shall not engage in any conduct that reflects adversely on his or her integrity or fitness as a Member, upon the marks, or upon the profession.

Rule 703

A CFPCM Certificant shall not practice any other profession or offer to provide such services unless the CFPCM Certificant is qualified to practice in those fields.

Rule 704

A CFPCM Certificant shall effect and maintain professional indemnity insurance in accordance with the requirements prescribed by the FPSB India from time to time. A CFPCM Certificant must notify the FPSB India in writing immediately of any material change to its professional indemnity insurance.

Rule 705

A CFPCM Certificant shall not misrepresent the status of their Membership of FPSB India.

Rule 706

A CFPCM Certificant shall not misstate their authority to represent the FPSB India. Specifically, a CFPCM Certificant shall not write, speak or act in such a way as to lead another to believe that one is officially




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representing FPSB India, unless the CFPCM Certificant has been duly informed to do so by the officers, directors or rules of the FPSB India.

Rule 707

A CFPCM Certificant shall co-operate with FPSB India in all aspects of any investigation or compliance review as per the disciplinary rules or procedures set out by FPSB India.

Rule 708

A CFPCM Certificant shall not mislead clients or any other party about the potential benefits of the CFPCM Certificant’s service.

Rule 709

A CFPCM Certificant who is an employee/agent shall perform professional services in compliance with lawful objectives of the employer/principal and in accordance with the FPSB India’s Code of Ethics, Professional Standards.

Rule 710

In all professional activities a CFPCM Certificant shall perform services in accordance with:

(a) Applicable laws, rules, and regulations of governmental agencies and other applicable authorities; and

(b) Applicable rules and other established policies of FPSB India including continuing professional development requirements, to retain the right to use CFP marks.

Rule 711

A CFPCM Certificant shall notify the FPSB India Member in writing of any conviction of a crime (as defined by the Member), or any professional suspension or revocation within the time specified by the FPSB India Member after the date on which the CFPCM Certificant is notified of the conviction, suspension or revocation.

Rule 712

A CFPCM Certificant shall notify the FPSB India of changes to contact information, including e-mail address, telephone number(s) and physical address, if any from time to time.

Rule 713

The CFPCM Certificant shall provide written information and/or discuss with the client the following:




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(a) Role and responsibilities of each party to the engagement at each stage of financial planning

(b) Terms under which the CFPCM Certificant will use proprietary products;

(c) Terms under which the CFPCM Certificant will use other entities/professionals to meet any of the agreement’s obligations;

(d) The process for terminating the relationship; and

(e) Procedures for resolution of client claims and complaints against the CFPCM Certificant.

Rule 714

A CFPCM Certificant shall know and reasonably apply the Financial Planning Practice Standards that are relevant to the scope of the engagement with the client. Any conduct by its Representatives or employees that relates to conduct of the CFPCM Certificant’s financial planning business shall be treated as the conduct of the CFPCM Certificant.

Rule 715

A CFPCM Certificant shall ensure that information and relevant documents given to or gathered by the CFPCM Certificant are securely stored to establish at any time that it has complied with the FPSB India’s Professional Standards and be available for inspection by the FPSB India when required. Such records shall be retained for seven years from the date the document was last acted upon.

DILIGENCE - Rules that relate to the Code of Ethic of Diligence

Diligence requires fulfilling professional commitments in a timely and thorough manner, and taking due care in planning, supervising and delivering professional services.

Rule 801

A CFPCM Certificant shall provide services diligently and on a timely basis.

Rule 802

A financial planning practitioner shall enter into an engagement only after securing sufficient information to satisfy the CFPCM Certificant that:

(a) The relationship is warranted by the individual’s needs and objectives; and




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(b) The CFPCM Certificant has the ability to either provide requisite competent services or to involve other professionals who can provide such services.

Rule 803

In preparing oral or written recommendations to clients, a CFPCM Certificant shall collect sufficient information to ensure appropriate advice can be given.

Rule 804

In preparing oral or written recommendations to clients, a CFPCM Certificant shall conduct or have access to research on financial strategies and products that may be appropriate to achieve the client’s identified needs and objectives. A CFPCM Certificant may rely upon an investigation undertaken by a third party provided it is reasonable to place reliance on the quality of such investigation.

Rule 805

In preparing oral or written recommendations to clients, a CFPCM Certificant must take reasonable steps to place the client in a position to comprehend the recommendations and the basis for the recommendations. A CFPCM Certificant should also take due care to explain the nature of the investment risks involved in terms the client is likely to understand.

Rule 806

A CFPCM Certificant must ensure all significant recommendations are made in writing. If any significant recommendations are given orally, then confirmation must be given in writing as soon as practicable.

Rule 807

A financial planning practitioner shall make and/or implement only recommendations that are suitable for the client and all agreed recommendations must be implemented in an accurate, efficient and timely manner.

Rule 808

In certain circumstances, Rules 803 to 805 inclusive will not apply where there is an express documented instruction by a client to limit or restrict the scope of the financial planning service (e.g., an execution-only transaction service or advice limited to a particular area or product or where a client refuses to provide information sought). The client must be warned prior to implementing the relevant transactions about the consequences of the CFPCM Certificant following the instructions.

Rule 809




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A CFPCM Certificant shall not move a client or cause a client to move from an investment to another investment without explaining to the client, in terms that the client is likely to understand, the reasons for the move. The CFPCM Certificant must demonstrate that the move is appropriate for the client.

Rule 810

A CFPCM Certificant shall confirm in writing to a client where a subsequent instruction given by that client significantly alters the financial strategy or balance of an existing portfolio under the supervision of the Member.

Rule 811

A CFPCM Certificant shall establish and maintain written policies and procedures for the effective control and conduct of its business.




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What are CFPCM marks? CFP marks are owned outside the US by US based FPSB Ltd., and FPSB India is the marks licensing authority for the CFP marks in India, through agreement with FPSB Ltd. Financial Planning Standards Board Ltd. owns the CFP marks outside the U.S. and permits qualified individuals to use these marks to indicate that they have met FPSB's initial and ongoing certification requirements. FPSB, US has affiliates across 26 countries globally (India is one of them). These affiliates are licensed to administer the CFP Certification Program in their territories, e.g. the CFPCM Certification issued by FPSB India is valid to be practiced in India. Cross Border Use: The cross-border use of CFP marks requires a CFP professional certified in one country to obtain certification in another country also where he or she intends to deliver, directly support or supervise the financial planning process or holds himself or herself out as a CFP professional. This is required in view of separate laws relating to taxes, companies, securities transactions and investment advisory prevailing in different countries. A CFP professional certified in one country can therefore apply and get certified to use the CFP Marks in another territory by obtaining CFP certification from the authorized body in that territory. He/she can practice Financial Planning in either or both the countries. Incidental Use: There is incidental use of CFP marks by a professional certified in one country while he or she is in another country to the extent of display on business cards, brochures and articles published. The restricted use of CFP marks requires a CFP professional to communicate the fact that he or she has obtained CFP certification in one country is certified to advise on financial planning matters in that country. Thus, the display of CFP marks in a territory other than the one in which he or she was first certified while delivering, directly supporting or supervising the financial planning process comes under the incidental usage of CFP marks. Usage of CFPCM marks: 1. Always use CFP in capital letters and without periods between letters, and with the symbol CM in superscript, as in CFPCM Certification. For instance, incorrect usages could be CFPCM C F P C.F.P. cfp 2. Always use CFPCM as an adjective instead of a noun, e.g. always use CFPCM certification, CFPCM certificant, CFPCM credential, CFPCM designation, CFPCM exam/examination, CFPCM professional, CFPCM practitioner or CFPCM mark.




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Incorrect usages are CFP advisor, CFP course, CFP education, CFP program, CFP syllabus, etc. 3. Always use CERTIFIED FINANCIAL PLANNERCM in capitals followed by Certification, Certificant, Practitioner, Professional, Mark, etc. It should always be used as a descriptive adjective. Incorrect usages could be Certified Financial Planner, certified financial planner 4. Do not use plurals as in CERTIFIED FINANCIAL PLANNERs or CFPs. The correct usages are CERTIFIED FINANCIAL PLANNERCM Professionals; CFPCM Practitioners, etc. 5. The CFPCM or CERTIFIED FINANCIAL PLANNERCM Marks may not be used as part of a domain name. They may appear as text or images throughout the website, in accordance with FPSB Ltd.’s or FPSB India’s rules for proper use. For instance, incorrect use is www.rameshcfp.com 6. The CFPCM or CERTIFIED FINANCIAL PLANNERCM Marks may not be used as part of an e-mail address by the CFPCM certificants. For instance, incorrect usages are [email protected]

[email protected], [email protected], etc.


http://www.rameshcfp.com/



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Ethics Questions

1) You have mentioned to Aamir that you shall ensure all information and relevant documents given to or gathered by you are securely stored to establish at any time that it has complied with the FPSB India’s Professional Standards and be available for inspection by the FPSB India when required. Such records shall be retained for seven years from the date the document was last acted upon. This is according to the Code of Ethics of __________.

a) Compliance b) Professionalism c) Diligence d) Objectivity

2) At the earliest point in the relationship, you have disclosed in writing to Ashok that you are authorized to sell or advise on a restricted range of products, and any other limitation of their capacity to serve him. You have complied with the Code of Ethics of _________.

a) Compliance b) Objectivity c) Diligence d) Competence

3) What is the correct sequence to perform six steps of Financial Planning Process to prepare a financial plan for the client?

1. Developing and Presenting the Financial plan 2. Analyzing and evaluating the client’s financial status 3. Implementing the Financial Plan 4. Monitoring the Financial Plan 5. Gather client data and determining Goals and Expectations 6. Establishing Client – Planner Relationships

a) 1, 3, 4, 5, 2, 6 b) 6, 2, 5, 4, 3, 1 c) 6, 5, 2, 1, 3, 4 d) 5, 6, 2, 1, 3, 4

4) Anuj before approaching you has also contacted another CFPCM Practitioner for the preparation of his Financial Plan. In his first meeting with the practitioner, Anuj asked him the sources of compensation available to the practitioner by making a Financial Plan for him other than fee. But the practitioner refused to answer this question by saying that this is out of the scope of




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engagement. According to FPSB India’s code of ethics, the practitioner has violated Code of Ethic of _________.

a) Objectivity b) Professionalism c) Fairness d) Integrity

5) Which of the following shall you avoid while providing Financial Planning services to Anuj and Sushma in line with the Ethical and Professional Conduct of CFPCM Certificant entailed by FPSB India?

a) Keep the client informed of developments in the field of Financial Planning. b) Advice the client in those areas in which you have competence. c) Seek council of qualified individuals for areas in which you lack adequate competence. d) Alter existing financial strategy promptly, even without confirming to client, if the change in

circumstances materially impacts the client’s financial goals.

6) Which of the following would not be violation of the “Principle of Integrity” in the performance of your

professional service to Veeru?

a) Exercising reasonable and prudent judgment in dealing with Dr. Vijay. b) Making misleading claims about the scope and areas of your competence. c) Giving the impression that you are representing the views of FPSB India. d) Engaging in conduct involving dishonesty, fraud, deceit or misrepresentation.

7) You as a CFPCM Practitioner use the CFPCM mark as a proclamation to the public that you:

(a) can be trusted with the clients’ financial affairs with confidence. (b) will competently fulfill the responsibilities owed to the client. (c) are governed by a professional Code of Ethics. (d) Possess exhaustive knowledge of all financial matters.

a) (a), (b) b) (a), (b), (c) c) (a), (c), (d) d) All of the above

8) Before beginning work on Sanjay’s Financial Plan, you have drafted a “Letter of Engagement” and sought Sanjay’s consent on the same. Sanjay asked you about relevance of such a letter. In the context of Financial Planning Profession, you explain about the “Letter of Engagement” as a _________.

a) professional requirement under Code of Ethics of FPSB India




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b) professional requirement under Practice Guidelines of FPSB India c) legal contract as per Contract Act 1872 d) document for his personal record

9) Sanjay saw your name with CFP Marks; he wants to know different ways in which the CFP Marks in

India can be written.

i) CERTIFIED FINANCIAL PLANNERCM

ii) CFPCM

iii) CFPcm

iv) C.F.P. v) CFPCM

vi) Certified Financial PlannerCM a) i) & ii) b) ii), iii), vi) c) iv), v) & vi) d) ii), v) & vi)

10) Before finalizing the Financial Plan, Sudha tells you that she wants to entrust the estate issues to a solicitor, who is a friend of her husband. Which of the following is your best stand?

a) Estate issues being substantial in the case, you maintain that the Financial Plan cannot be an integrated one if the same is outside your purview, hence decline.

b) This is permissible subject to such an arrangement finding an explicit mention in the Financial Plan for the said activity.

c) This is permissible subject to the advice of the solicitor being integrated into the Financial Plan and monitored along with the Plan.

d) You agree to the arrangement subject to the advice of solicitor made known to you so that you modify the Financial Plan accordingly.

11) Prior to providing any Financial Planning services, you a Financial Planning practitioner and Vinay, as your client shall mutually define the scope of the engagement. The letter of engagement would define the scope of engagement by discussing

i) Identification of the service(s) to be provided ii) Financial Planning practitioner’s compensation arrangement(s) iii) Analysis and evaluation of client’s current situation iv) Determining the clients and the Financial Planning practitioner’s responsibilities; v) Establishing the duration of the engagement;




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vi) Determine the strategies to achieve financial goals

a) i), ii), iv) and v) b) ii), iii), iv) and vi) c) i), ii), iii), iv) and v) d) i), ii), v) and vi)

12) While entering into a relationship with you, Pardeep assumed that you being a practicing Certified Financial Planner, you are fully able to take care of the execution of all aspects of his Financial Plan, i.e. Taxation, Insurance, Investments, etc. As per FPSB India Code of Ethics, what is the best proposition in this context?

a) This is the right assumption which can be made about all Certified Financial Planners. b) The scope and limitations of the services of the Certified Financial Planner needs to be disclosed in

the beginning, specifically in writing, by the Certified Financial Planner to the client. c) A Financial Planner can never take care of all aspects of a Financial Plan. d) A Financial Planner is concerned with only making a Financial Plan and not its execution.

13) You have already mentioned to Ramesh that you shall confirm in writing to him where a subsequent instruction given by him significantly alters the financial strategy or balance of an existing portfolio under your supervision. You have complied with the Code of Ethics of __________.

a) Diligence b) Compliance c) Confidentiality d) Objectivity

14. Rakesh informed you that prior to consultations with you, he had contacted another CFPCM practitioner who demanded a flat remuneration of 35% of the “Assets under Management” from Rakesh for providing his services. Is there any violation of “Code of Ethics” as stipulated by FPSB India by the earlier Practitioner?

A) This is a matter of mutual consent between the practitioner and the client only. B) This is a violation of Code of Ethics of Professionalism. C) This is a violation of Code of Ethics of Fairness. D) This is a violation of Code of Ethics of Compliance

15) Which of the following usages of the certification mark owned (outside the U.S.) by FPSB Ltd. are

correct? 1. CFP Qualification

2. CFP Certification 3. CFP Education




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4. CFP Professional 5. CFP Practitioner

a) 1, 3 and 4 b) 1, 2 and 5 c) 2, 4 and 5 d) 1, 3 and 5

16. In addition to drafting and executing a Financial Plan for them, Raj wants to know whether you can

provide them some additional services regarding accounting / record keeping and day to day cash management for their entire household / commercial setup. Does FPSB Code of Ethics prohibit the practitioner from the same?

a) No as it is strictly prohibited by the FPSB Code of Ethics. b) No because any Certified Financial Planner is not expected to interfere into day to day cash

management of the client. c) No because this is completely out of the scope of Financial Planning services. d) Code of Ethics binds a member not to provide such services unless the member is qualified to

practice in those fields and is certified as required by law.

17. In your initial meeting, to make an impression on your client, you discuss the Financial Plan made by you

for a famous doctor and also his spending habits with Arun. Which Code of Ethics prohibits you to have such a discussion with Arvind?

a) Code of Ethics of Professionalism b) Code of Ethics of Confidentiality c) Code of Ethics of Fairness d) Code of Ethics of Integrity

18. While interacting with you, Shahrukh came to know about your investing style, viz. Direct Equity investment and some schemes of Mutual Funds. He wants to know whether you can manage some of his money in your investments and assign him appropriate share in the profits thereof. As per FPSB Code of Ethics is it possible for you?

a) Yes b) Yes, but with prior permission from FPSB against a written proposal letter from Sahil c) Yes, but with a proper written agreement in which all terms and conditions must be stipulated in

advance d) No

19. You as a CFPCM certificant have made it clear to Shahrukh that you shall enter into an engagement

with him as a client only after securing sufficient information to be satisfied that: a) The relationship is warranted by Rahul’s needs and objectives; and




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b) You have the ability to either provide requisite competent services or to involve other professionals who can provide such services.

You have followed the Code of Ethic of __________. a) Diligence b) Professionalism c) Compliance d) Fairness

20. Sanjay has asked you a practicing CERTIFIED FINANCIAL PLANNERCM about the ownership of CFPCM mark in the world. You have explained to him that _________________. a) CFPCM mark is owned by FPSB India b) CFPCM mark is owned by FPSB across the world c) CFPCM mark is owned by CFP Board across the world d) CFPCM mark is owned by FPSB, Denver (US) outside the United States

21. Sanjay, in a business conference met a CFPCM Practitioner who was one of his old friends. Both of them were discussing about their professions and businesses and during the talks Sanjay asked for some recommendation on his personal finances from his CFPCM friend. He suggested Sanjay to come to his office and he will provide the recommendations in writing. Sanjay asked, is it important to have it in writing? You as a CFPCM Practitioner explained that all recommendations concerning the financial affairs of a client should be presented in writing because:

1) It is regarded as best practice under the FPSB India code of ethics and rules of professional conduct.

2) It provides substantial protection to the planner under common laws against any claims arising thereof.

3) It will not attract the law of contract to determine the civil rights of both the parties. 4) It gives the client the necessary time to fully consider the planner’s recommendations.

a) 1, 2 and 4 only b) 2, 3 and 4 only c) 1 and 4 only d) 1, 2, and 3 only

22) While preparing Anita's Financial Plan, in all your oral or written recommendations, you have taken

reasonable steps to place Anita in a position to comprehend the recommendations and the basis thereof. You have also taken due care to explain the nature of the investment risks involved in terms she is likely to understand. You have complied with the Rules that relate to the Code of Ethic of _________.

A) Professionalism B) Diligence C) Fairness




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D) Competence

23. Gautam’s friend Dinesh used to take advice on his investments from a Financial Planner certified by FPSB India who co-mingled the money of Dinesh with his own money. However, the Financial Planner maintained good records to segregate both cash flows. Which of the following Principles has his Financial Planner violated?

a) Integrity b) Objectivity c) Fairness d) Professionalism

24) Some time back Gautam’s investment advisor, also a CFP, recommended him a savings product stating that it offered an assured annual return of 12%. Gautam was skeptic about the returns and did not invest. You realize that the product has been misrepresented. In reality it is the simple rate of interest with a lock in period of 10 years. According to you the advisor has violated.

a) Code of Ethics of Fairness b) Code of Ethics of Integrity c) Code of Ethics of Professionalism d) Code of Ethics of Diligence

25) Sameer has asked you about FPSB India’s nature of constitution. You have explained him that FPSB India

is a_________________

a. Self-Regulatory Organization b. Professional Standards Setting Body c. Professional Regulatory Organization d. A Quasi Government Body




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Additional theory Questions: Important

Retirement planning

1. Rishi wants to know whether he is eligible to withdraw from his Employees’ Provident Fund for purchase of a bigger house.

a) Yes, as he has been a member of the fund for more than 3 years b) No, as he has not been a member of the fund for more than 10 years c) Yes, as he has been a member of the fund for more than 5 years, an provided he purchases

the house in his own name or jointly with his wife d) Yes, as he has been a member of the fund for more than 5 years, and provided he

purchases the house in his own name or in his wife’s name

2. Veeru’s parents are maintaining a joint Senior Citizen Saving Scheme account in which Veeru is the sole nominee. He wants to know the status of the account after the demise of either of his parents. Which of the following is not appropriate in this context?

a) The surviving parent may operate the account alone. b) The surviving parent can receive the amount deposited and close the account. c) Veeru, being the nominee, will automatically replace the deceased parent in the joint

account along with the surviving parent. d) The account may be continued for the remaining term with the surviving parent as the

only holder and Veeru as the nominee

3. Shahid is a member of Employees' Pension Scheme. If he decides to leave his present job at 32 years of age after 8 years of service what will happen to his existing Pension Scheme?

a) He can either take withdrawal benefit or scheme certificate so that his 8 year service can be added to any future service that he may put in, in any other covered establishment.

b) He cannot take any withdrawal benefit immediately but can add it to any future service that he may put in, in any other covered establishment.

c) He can either take withdrawal benefit or scheme certificate only on completion of 10 years of service. d) He can take withdrawal benefit only.

4. Gurpreet has heard about reverse mortgage. He finds it attractive as it provides a person regular cash

flows from the house property by borrowing against is to meet the living expenses during retirement. He wants to know the features of the same. I. Reverse mortgage provides the house owner a stream of income against mortgage of house

while owning and occupying it till lifetime, without repayment or servicing of the loan. II. The loan amount received from the lender can be used for any purpose by the borrower. III. The lump-sum or periodical payments received from the lender is not subject to tax in the

hands of the borrower. IV. The borrower' heir may repay the loan with accumulated interest and have the mortgage

released without resorting to sale of the property.




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(a) I, II, III (b) I, III, IV (c) I, III (d) III, IV

5.Gurpreet has not withdrawn any amount from his PPF account till date. What is the amount of withdrawal he can make from his PPF account? You inform him that an

(a) amount not exceeding 50% of the balance at the end of 3rd year immediately preceding the year in

which the amount is withdrawn or 25% at end of preceding year whichever is lower (b) amount not exceeding 50% of the balance at the beginning of 4th year immediately preceding the

year in which the amount is withdrawn or 50% at end of preceding year whichever is lower (c) amount not exceeding 50% of the balance at the end of 4th year immediately preceding the year in

which the amount is withdrawn or 50% at end of preceding year whichever is lower (d) amount not exceeding 40% of the balance at the end of 4th year immediately preceding the year in

which the amount is withdrawn or 50% at end of preceding year whichever is lower

6. Rajesh’s father Mr. Gurunath has taken a loan under reverse mortgage scheme against his house in Gurgaon which is valued today at Rs. 20 lakh. Rajesh is curious to know, if the loan amount being received by his father will be treated as income and whether the alienation (sale) of property for recovery of loan attracts capital gains?

a) The amount received by Mr. Gurunath shall be treated as his income and it will be taxable in his

hands and for the purpose of alienation (sale) of property for recovery of loan shall attract capital gain.

b) The amount received by Mr. Gurunath shall not be treated as his income and shall be exempt from tax and for the purpose of alienation (sale) of property for recovery of loan shall not attract capital gain.

c) The amount received by Mr. Gurunath shall not be treated as his income hence shall not be taxed, for the purpose of alienation (sale) of property for recovery of loan shall attract capital gain.

d) The amount received by Mr. Gurunath shall be treated as his income and it will be taxable in his hands and for the purpose of alienation (sale) of property for recovery of loan shall attract capital gain but only in case of death of the mortgagor.

7. Rajesh read a draft offer document that PFRDA has come out with a New Pension Scheme (NPS) for all citizens of India. He is also thinking to invest in NPS but he is confused with regards to the withdrawal provisions of the scheme in Tier-I. You are required to provide him with the correct details of the withdrawal.




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i. If he exits before 60 years of age, he will have to invest at least 20% of the pension wealth to purchase a life annuity and the rest 80% of pension wealth may be withdrawn as a lump sum.

ii. If he exits on attaining 60 years of age, he will have to invest at least 40% of the pension wealth to purchase a life annuity and the rest 60% of pension wealth may be withdrawn as a lump sum or in a phased manner between ages 60 and 70 years.

iii. If he exits before 60 years, he will have to invest at least 80% of the pension wealth to purchase a life annuity and the rest 20% of pension wealth may be withdrawn as a lump sum.

iv. If he exits on attaining 60 years of age, he will have to invest at least 60% of the pension wealth to purchase a life annuity and the rest 40% of pension wealth may be withdrawn as a lump sum or in phased manner between ages 60 and 70 years.

a) i & iv b) i & ii c) ii & iii d) iii & iv

Insurance Planning

1. Akshay wants to know, what would happen to the No Claim Bonus on his car insurance after he sells his car.

a) He can enjoy the No Claim Bonus on the premium for his new car if he buys it within a specified period from the date of sale of his old car

b) No Claim Bonus is lost after sale of old car c) He can enjoy only 50% benefit of the No Claim Bonus on the premium for his new car if he buys

it within a specified period from the date of sale of his old car d) He can avail benefit of No Claim Bonus on premium paid for Insurance taken for other purposes

from same Insurer

2. Sachin wants to invest in ULIP, but he wants to be cautious before entering a long period of contract. As Per IRDA ULIP Guidelines, if he wants to return the policy within 15 days free look period what amount would be refunded to him?

a) He shall be refunded the fund value subject to deduction of expenses towards medical

examination, stamp duty and proportionate risk premium for the period of cover. b) Full Premium paid is returned back to him. c) Premium paid less commission paid to intermediary is refunded to him. d) He shall be refunded the fund value.




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3. Shahrukh wants to buy a life insurance policy on the life of his father as well as both his brothers. However, in case of any eventuality he wants to reserve all legal rights of receiving the policy benefits in his name. He wants to know whether it is legally possible for him.

a) Yes, he can buy the policy in the desired way. b) Yes, but he cannot reserve the right to receive the policy benefits. c) No, in the absence of insurable interest he cannot buy life insurance policy in their name. d) He can buy the policy only in the name of his father in the desired way

4. Arun working in a Legal Firm as Legal Advisor is always under an apprehension that his profile of giving

legal advice to clients is full of risk. He plans to take Professional Indemnity Insurance to minimize his professional risk but he is not sure that what is the scope of the policy? He has approached you for your advice. You advise that the Professional Indemnity Insurance has the following scope:

A) Any error and/or omission on his/her part committed whilst rendering professional service. B) Any liability arising out of any criminal act or act committed in violation of any law or ordinance

is not covered. C) Legal cost and expenses incurred in defense of the case. D) All of the above.

5. Rajnikant proposed to buy another life insurance policy which also offered Critical Illness Rider for an additional premium. Rajnikant was considering a sum assured of Rs. 10 lakh for the death benefit and Rs. 2 Lakh under Critical Illness. Before finalizing the same Rajnikant wants to know that in case he is identified with a disease, covered under Critical Illness Rider, after 2 years of having taken the policy, what amount would he receive as claim under the Critical Illness Rider?

a) A sum of Rs. 2 Lakh shall be paid when such a disease is identified and certified by a Doctor b) Actual Expenses, subject to a maximum of the Rider amount, shall be paid after treatment of

disease. c) Rider benefit is available only in case of death of the Insured person by the disease. d) A sum of Rs. 2 lakh shall be paid when disease is identified and another Rs. 2 Lakh shall be

paid at the time of death.

6. One of Sahoo’s close friend, who was driving her car, seriously injured a pedestrian crossing the road.

She wants to know whether it is a punishable offence in law or there are other premises which need to be established.

(a) Her friend needs to establish that it was a freak case of accident which was unavoidable due to the circumstances.

(b) The prosecution does not have to prove the offence before law that the accident was a result of rash and negligent driving, it is prima facie an offence to injure a pedestrian.

(c) Her friend having a valid driving license has to prove her innocence by establishing that the pedestrian was negligent while crossing the road.




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(d) The prosecution has to prove that the accident was the result of rash and negligent driving before the offence is established.

7. On account of the death of Govind's wife, he needs to file a claim with the insurance company as the nominee to his wife's insurance policy. He wants to know what the IRDA (Protection of Policyholder's Interests Regulations) stipulate in respect of claims procedure. I. The insurer shall state the primary documents which are normally required to be submitted by a

claimant in support of a claim. II. Any query or requirement of additional documents shall be raised by the Insurer in a piecemeal

manner within a period of 15 days of the receipt of the claim. III. Where an investigation is necessary, shall be initiated and completed not later than 6 months

from the time of lodging the claim. IV Where the claim is pending identification of the rightful beneficiary, the insurer shall hold such

amount and accrue interest rate of 2% over the bank rate in the beginning of the financial year. (a) I, II, III (b) I,II, III, IV (c) I, III (d) II, IV 8. You have advised Avinash to purchase householders Insurance Policy to insure his house as well as contents of his house. Avinash discusses with you about the features of Householders Insurance Policy. As per you, which of the following is not a feature of Householders Insurance policy? a. Loss or damage by the insured’s domestic staff’s direct or indirect involvement in an attempted burglary

is covered. b. He can make an endorsement to the policy during the currency of the policy to record alteration related

to change of Insurable interest by way of sale or mortgage. c. Insured can cancel the policy during the currency of policy and get refund of premium paid (after

adjustment of administrative and other exp.) on pro-rata basis. d. The Building is insured as per the re-instatement value and the contents are insured as per the market

value. 9. Sonali told you that her ex-husband had purchased a life insurance policy under the MWP Act, 1874 prior to their divorce. The beneficiaries of the policy are Sonali and their two children. Sonali wants to know the significance and the benefits of this policy. 1) No alterations can be made by the husband once the policy is commenced 2) The proceeds of such a policy cannot be claimed by the husband or his creditors or form part of the husband’s estate 3) Alterations can be made by the wife once the policy is enforced 4) The life assured is the wife




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a. 1, 2, 4 b. 1, 2 c. 2 d. 1, 4

10. Urvashi has not bought personal accident insurance cover, though her car is covered for damages from accident. She wears seat belt and drives carefully. You, as a CFPCM professional, had your following observation about her risk management? a. Urvashi has insured the property risk; she controls some of her personal risk and retains the rest of the

risk. b. Urvashi has transferred her personal risk to other drivers of the road, insured her property risk and can

claim damage if accidents are caused by third party negligence. c. Urvashi has controlled her personal risk and insured her property risk. d. Urvashi has not done anything to manage her risks and has to immediately go for accident and personal

risk cover. She cannot rely on third party damages alone to cover the risk of the road 11. Rajinder renewed his car insurance which was due for renewal on 18th March, 2009 by sending out a premium cheque on 14th March, 2009 to the insurer for Rs. 4,500 towards a sum assured of Rs. 1 lakh. He received a cover note subject to realization of cheque. Rajinder’s car met with an accident on 27th March, 2009. He enquired from the insurer about his insurance policy for the car and was shocked to learn that the same was not renewed due to dishonour of his cheque. He seeks your advice regarding admissibility of insurance claim on the basis of cover note received. You advise that _______. a. Rajinder is not entitled to the claim amount as the renewal premium cheque was not honoured. b. Rajinder is entitled to the claim as he got a cover note as a proof of his having renewed the policy. c. Rajinder is entitled to get full sum assured because the company didn’t inform him about the cancellation

of the contract because of dishonouring of his cheque. d. Rajinder has to get approval from Insurance ombudsman for clearance of his claim from the insurer.




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Investment Planning

1. You have suggested a strategy which aims to invest more when the share price falls and less when the share price rises. It is done by calculating predetermined amounts for the total value of the investment in future periods and then making an investment to match these amounts at each future period. You are indicating a technique known as _________.

a) Rupee Cost Averaging b) Value Averaging c) Economic Cost Averaging d) Weighted Averaging

2. For the marriage of their children, Ashwin and Sumedha wish to gift each child 200 grams of gold jewelry. You suggest the following strategy to accumulate gold or its equivalent with lowest cost and without incurring risks other than those related to gold as a commodity.

(a) They should regularly trade in Gold Futures to profit from rising prices and thus build suitable corpus

to buy gold when required (b) Buy Gold ETF units of 1 gram each systematically over the period and redeem the same at the time of

marriage to buy gold jewelry (c) They should invest systematically in a risk-free instrument and redeem the same on marriage to buy

gold jewelry (d) Buy gold jewelry every year in suitable quantity, get the same exchanged for appropriate jewelry at

their marriage 3. You have found that all the stocks in Mrs. Rukmanidevi’s portfolio move together and have a high correlation. How will that impact the risk and return of the portfolio?

a. The portfolio will have a return that is the average of the stocks included in it, but have a risk that is lower than the risk of the stocks.

b. The portfolio will have a return that is the average of the stocks included in it, but have a risk that is higher than the risk of the stocks.

c. The portfolio will have a return and risk, which lies in the range of risk and return of the stocks included in it.

d. The portfolio will have a return that is lower than the stocks included in it, but have a risk that is higher than the risk of the stocks.

4. Gurpreet finds it difficult to select an appropriate scheme for an investment as there are a number of

mutual fund schemes floating in the market. In the degree of importance, he would like to know the factors you would consider while suggesting an appropriate mutual fund scheme to him. I. Historical Performance of Scheme II. Asset Allocation




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III. Risk Profile of Gurpreet vis-a-vis Scheme IV. Cost Structure V. Investment Objective vis-a-vis Goal.

(a) V, III, II, I, IV (b) I, V, III, IV, II (c) I, III, V, II, IV (d) V, III, I, IV, II

5. Vijay plans to take a loan from a bank for purchasing a house in Ahmadabad. He wants to know, against which type of mortgage do the banks normally lend home loan?

a. Simple Mortgage b. Usufructuary Mortgage c. English Mortgage d. Equitable Mortgage

6. During the recent period you feel that the stock market has shown a strong bullish run. The Super

Industry Ltd.’s Shares, which Prabhat bought for Rs. 900 per share about nine months back, are now at Rs. 1,760 per share. He does not want to sell his shares since he is bullish in the long term. He wants to protect the appreciation on the stock price from the downside which market may face in the short term. He approaches you to guide him what strategy he should use. CALL Option of Rs. 1,740 is available @Rs. 60, PUT Option of 1740 is available @ Rs. 50.

a) Buy PUT option b) Sell PUT Option c) Buy CALL Option d) Sell CALL Option

7. Shahrukh and Aamir are good friends and take keen interest in the stock market. Shahrukh by nature is very speculative while Aamir is a conservative in his approach. They both are bullish on the market and expect the market to go up. Shahrukh therefore took a long position on April Nifty futures at 3,400 while Aamir bought one lot of April Nifty call option at 3,400 at a premium of Rs. 100 per unit. The lot size is 50. Assuming the Nifty closes on the settlement day at 3200, which of the following is a correct statement?

a) Shahrukh will incur a loss of Rs. 10,000 and Aamir will incur a loss of Rs. 5,000. b) Shahrukh will incur a loss of Rs. 10,000 and Aamir has an obligation to deliver the share on the

settlement date. c) Shahrukh will incur a loss of Rs. 10,000 and Aamir will incur a loss of Rs. 10,000. d) Shahrukh will gain Rs. 10,000 and Aamir will incur a loss of Rs. 5,000.




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Ethics & Financial Planning Process 1. Irawati had earlier received calls from certain institutions offering free services of Financial Planning through their Financial Planners by subscribing to their financial products and services. She asks you the features of CERTIFIED FINANCIAL PLANNERCM practitioner that distinguishes you from other financial planners. You tell her that__________. (I) CFPCM practitioner has to go through an internationally accepted curriculum framework and meet the given competency profile (II) A CFPCM practitioner, once certified can follow any institution’s guidelines of Financial Planning without any recourse to FPSB India (III) CFPCM practitioner has to meet stringent initial certification standards and continuing education to remain certified (IV) CFPCM practitioner has to abide by FPSB India’s Code of Ethics and professional guidelines (V) A CFPCM certificant has to necessarily do a fee-based Financial Planning Which of the above are correct?

a. (II) and (V) only b. (I), (III) and (IV) only c. (I) and (II) only d. (I) and (IV) only

2. As per the practice guidelines of FPSB India followed by you, being a CERTIFIED FINANCIAL PLANNERCM practitioner, which amongst the following is the next step after defining and discussing with Urvashi the basic terms of the financial plan construction?

a. To collect the general quantitative information of the prospective client b. To inform the prospective client about the terms of the engagement c. To define the financial goal of Urvashi d. To share past financial records of your existing clients with your prospective client in order to

make him comfortable with number and success of your clientele funds 3. While interacting with you during the data collection sessions, Gunjan and Neerja became so impressed with your professional approach and the trust created that the couple requested you to become a whole time legal guardian of their kids regarding execution of all required financial steps at every stage in future even without further recourse to the couple. As per FPSB Code of Ethics, is this possible for you? a. Yes b. Yes, but you can do it in your individual capacity and not in professional capacity. c. Yes, but in that case, you will not be in a position to charge any professional fee from the couple.




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d. No 4. In establishing relationship with the client, which of the following situations of conflict of interest is not foreseen in the Financial Planning Practice Standards? (a) Any circumstances or relationships or facts that would place CFP practitioner's interests in conflict with the client's interests (b) Any advice that would be in conflict with financial products/services industry's business interests (c) Any personal conflict that would affect a CFP practitioner's ability to work successfully with the client (d) Any circumstances or relationships or facts that would place the interests of one client in conflict with another client 5. Under Financial Planner Code of Ethics and Professional Responsibility, the principle of Fairness is most appropriately interpreted to mean that a CFP professional would _______. (a) assess personal prejudices, feelings and desires in ascertaining the treatment he intended in a similar situation as the client's (b) owe the client all due services meant to be fairly provided, without prejudices and with proper balance of interests (c) be fair in charging, besides the terms of payment, for the services to be rendered outside the scope of engagement (d) treat all clients regarding the same service and deliverables fairly equal 6.Which of the following is an infringing use of CFP marks to describe an individual eligible to use them? (a) CFP certificant (b) CFP expert (c) CFP professional (d) CFP practitioner 7. Which of the following does not correspond to the principle of “Professionalism” under Financial Planner Code of Ethics and Professional Responsibility? (a) Enhancing and maintaining the profession’s public image and its ability to serve the public interest (b) Complying with appropriate rules, regulations and professional requirements (c) Behaving with dignity and showing courtesy to clients, fellow professionals and business associates (d) Appearing in executive attire, using latest gadgets of communication, find dining skills, etc 8. Which of the following is not covered under the principle of “Competence” under Financial Planner Code of Ethics and Professional Responsibility?




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(a) Attaining and maintaining an adequate level of abilities, skills and knowledge in the provision of professional services (b)Consulting appropriately with other professionals or referring to them on realizing that one has limitations in performance of certain tasks (c)Committing oneself to a continuing learning process and professional development (d)Competing in all components of financial planning with the best professionals in order to provide the client professional service 9. You are a Financial Planner and have been approached by Jack & Jill. Their funds are limited and their needs are many. Some of their needs are: (a) To start an investment plan for funding their child's education (b) To set up a Testamentary Trust for their child (c) To set up a contingency fund amounting to 3 months of living expenses (d) To start saving for retirement (e) To purchase life and health insurance. Arrange these needs in the descending order of priority:

a) c, e, a, d, b b) d , e ,b ,c ,a c) b , d, e , a , c d) b, e , a, c, d

10. In order to prevent unnecessary litigation it is preferable. Select one: a) To Determine the terms in the presence of witnesses b) To verbally determine all the terms and conditions c) To sign a Letter of Engagement before commencing the six-step planning process d) To charge the client upfront before preparing the Plan


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Module VI (Exam 5): Advanced Financial Planning (AFP) (Also the Challenge Status Exam)

Testing Objectives, Learning Objectives & Detailed Topic List Testing

Objectives:

The test presents a simulated environment for the candidate to have an understanding of the entire financial situation of a client, the household. The immediate and future cash flow situation, assets and liabilities, financial goals of the client to meet in the near and long term, the parameters related to the economy, the market and life are all considered in arriving at appropriate solutions. The emphasis is on recognizing the laid down strategies as possible alternatives to seek the most appropriate solutions. The strategies outlined present the situation before a prospective financial planner to assess and analyze the given information within the ambit of certain constraints and look out for possible opportunities. Also envisaged is the critical evaluation of the strategies for the desired pathway to a financial plan as well as the development of alternative strategies to modify the plan.

Learning Objectives:

The candidate pursuant to qualifying in this exam shall be eligible to receive CFPCM

certification subject to the fulfillment of the experience criterion and the adherence to laid down Code of Ethics and Professional Responsibility. Post certification, the candidate

shall be entitled to work as CFPCM professional preparing, executing and reviewing financial plans of the clients. Thus, a candidate should be able to enter into an engagement with a client to provide services with respect to one or more components of financial planning or a comprehensive financial plan which may include its execution and review as well, under a laid down financial planning process.

The detailed testing methodology as required in different sections for a candidate to prepare is as follows:

Section – I: Financial Planning Process, Practice Standards and Professional Responsibility

Testing Objective Theoretical testing knowledge: ‘Grade 1’ Theoretical testing clarity of concepts or

basic numerical skills: ‘Grade 2’ Total weight to Exam 5 (each study)

14%

Nature of Test Items

2 items: 2 marks each 1 item : 3 marks

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Sub-section 1: Financial Planning environment Testing and Difficulty grade

‘Grade 1’

Detailed Topics 1.1 The 6-Step Financial Planning Process

1.2 Client engagement rules, conflicts resolution and documentation

1.3 Financial Planning Practice Standards

1.4 Financial Planner Code of Ethics and Professional Responsibility, Model Rules of Conduct

Sub-section 2: Financial situation analysis, basic risk profiling and factors in financial prudence

Testing and Difficulty grade

‘Grade 2’

Topics 2.1. Risk Profiling of the client

2.2. Asset profiling, its allocation, liquidity and returns profile

2.3. Financial behavior and financial decision making

2.4. Debt Management 2.5. Personal Financial Statement Analysis

2.6. Net Worth and Financial Ratios

2.7. Loan schedules 2.8. Allocation of resources, cash flow to laid down goals

2.9 Basic and goal-specific asset allocation

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Section – II: Risk Analysis and Insurance Planning

Testing Objective Theoretical testing knowledge: ‘Grade 1’

Theoretical testing clarity of concepts or

basic numerical skills: ‘Grade 2’

Numerical testing analytical skills: ‘Grade 3’

Total weight to Exam 5 (each study)

18%


1 item: 2 marks

1 item: 3 marks 1 item: 4 marks

Sub-section 1: Insurance as a risk mitigation tool, its outreach, legal aspects and provisions


‘Grade

1’ Topics 1.1 Insurance concepts and perception of risk

1.2 Assessment and identification of risk exposure

1.3 Types of personal risk covers – Assets, Life, Health

1.4 Insurance contracts and their legal discharge 1.5 Insurance provisions and basis of valuation

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Sub-section 2: Risk assessment and basis of various risk covers


‘Grade 2’

Topics 2.1 Assessment and identification of risk exposure

2.2 Selection of insurance products – purpose, type, coverage and duration

2.3 Basis of various risk covers – reinstatement 2.4 Individual health insurance and family health protection covers

2.5 Critical illness and disability covers

2.6 Various business specific covers

Section – III: Retirement Planning and Employee Benefits

Testing Objective Theoretical testing clarity of concepts or basic numerical skills: ‘Grade 2’

Numerical testing advanced analytical skills, strategy evaluation & synthesis:

‘Grade 4’ Total weight to Exam 5 (each study)

16%

Nature of Test Items 1 item: 3 marks

1 item: 5 marks

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Sub-section 1: Assessment of retirement needs and options at various life stages of a client


‘Grade 2’

Topics

1.1 Retirement solutions appropriate to the life stage of client 1.2 Time horizons pre-and-post-retirement

1.3 Profile of fixed and financial assets on retirement

1.4 Income generating potential of various assets 1.5 Other income streams supporting retirement expenses 1.6 Assessment and analysis of various pension instruments available – Annuities,

NPS, PPF, EPF 1.7 Consistent savings towards retirement and its monitoring

Sub-section 2: Accumulation and management of retirement corpus; factors influencing decisions - Testing and Difficulty grade ‘Grade 4’

2.1 Critical assessment of all parameters – economic and client-specific 2.2 Financial objectives on retirement and correct estimation of corpus

2.3 Retirement corpus to accommodate charity, gifts during survivaland

bequeathing 2.4 Monitoring of allocated savings to the retirement corpus

2.5 Estimation of required rate of return and risk management

2.6 Estimation of withdrawal rate and possible retrenchment

2.7 Management of retirement funds near retirement with focus oncapital

protection 2.8 Choosing the right annuity product on retirement and diversifyingincome stream 2.9 Tax efficiency of retirement income streams 2.10 Reverse mortgage as a possible retirement income alternative

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Section – IV: Investment Planning

Testing Objective

Theoretical testing knowledge: ‘Grade 1’ Numerical testing analytical skills: ‘Grade 3’ Numerical testing advanced analytical skills, strategy evaluation & synthesis: ‘Grade 4’


32%



2 items: 5 marks each

Sub-section 1: Understanding various products and their profile for goal based investing


‘Grade 1’

Detailed Topics 1.1 Investment products – Fixed income, equity, mutual funds,derivatives,

commodities, small savings, etc. 1.2 Investment risks associated with various products

1.3 Risk profiling of products suited to client’s profile and goal 1.4 Real Estate as an asset category and investment class

Sub-section 2: Asset allocation, measurement of portfolio risk and returns


‘Grade 3’

Topics 2.1 Investing funds in the appropriate Asset Allocation

2.2 Changing asset allocation with change in life stages

2.3 Monitoring progress of investment portfolio

2.4 Measurement of portfolio risks and returns 2.5 Valuation of securities

2.6 Performance analysis of securities, market and portfolios

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Sub-section 3: Investment strategies; goal- based portfolio construction, analysis, rebalancing and optimization


‘Grade 4’

Detailed Topics 3.1 Goal-specific investing in strategic asset allocation

3.2 Monitoring of investment portfolio to assess goal achievement 3.3 Analysis of portfolio returns

3.4 Investment strategies – active and passive

3.5 Systematic investments and Value averaging methods

3.6 Investment styles 3.7 Ascertaining appropriate return to meet goals and devisediversified

portfolio 3.8 Income generating potential of portfolios

3.9 Portfolio rebalancing 3.10 Portfolio optimization

3.11 Systematic redemption of portfolio near goals

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Section – V: Tax Planning and Estate Planning

Testing Objective Theoretical testing knowledge: ‘Grade 1’

Theoretical testing clarity of concepts or

basic numerical skills: ‘Grade 2’ Numerical testing advanced analytical skills, strategy evaluation & synthesis: ‘Grade 4’


20%



1 item: 5 marks each

Sub-section 1: Tax incidence and relative tax efficiency; Understanding and execution of

succession strategies


‘Grade 1’

Topics

1.1 Comparative tax advantage of various investment products

1.2 Tax compliances 1.3 Tax incidence of various transactions

1.4 Tax efficiency in the transfer of assets

1.5 Characteristics and efficiency of various Estate vehicles 1.6 Provisions of Hindu and Indian Succession Act

1.7 Succession efficiency of all asset transactions

1.8 Estate planning for family business and family trust

Sub-section 2: Tax structure of investment, portfolio, business forms, status, etc.


‘Grade 2’

Topics

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Sub-section 3: Tax liability of various income of clients, business income, investment income and capital gains, transaction deals


‘Grade 4’

Topics

3.1 Tax aspects of redemption from investments, portfolios 3.2 Tax liability computation of individual clients

3.3 Tax liability computation of business forms

3.4 Income from house property – self-occupied and rented house 3.5 Taxability of mutual funds – income, capital gains of debt schemesincluding

dividend reinvestment options 3.6 Bonus and dividend stripping rules while computing capital gains

3.7 Taxability of off-market transactions

2.1 Taxability of various securities transactions

2.2 Tax adjusted returns of investments 2.3 Residency rules and taxation aspects of various status

2.4 Treatment of allowances and perquisites

2.5 Incidence of capital gains and their taxation 2.6 Carry forward and netting of capital gains

2.7 Tax structure of business forms

2.8 Trust structure for Estate planning and tax efficiency

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Case: Roger

(Reference date: 1st April, 2017)

Roger, aged 29 years, is working with a multinational company since December 2010. He has approached you, a CFPCM practitioner, for preparing his Financial Plan. He is staying in his own house at Ahmedabad. His wife Angela, aged 31 years, is a fashion designer. She has set up a boutique on rent and earned a net profit of Rs. 5.5 lakh in the previous financial year. They have a son, Mark of age 4 years, and a year old daughter, Stephanie. Roger is also supporting his parents to the extent of Rs. 20,000 per month. They stay at their ancestral house at Surat. The family’s monthly household expenses are Rs. 40,000 p.m. (excluding insurance premium and EMIs). Roger normally gets 10% increase in his gross salary year-on-year in the beginning of every financial year, apart from bonus. The bonus for the previous financial year at Rs. 3.3 lakh (net of tax) shall be credited to his account at the end of this month. He has taken a family floater Health policy for Rs. 15 lakh (premium paid in the previous year is Rs. 16,268).

Roger’s monthly salary (for FY2017-18):

Basic Salary : Rs. 60,000 DA (forming part of Salary) : 50% of Basic salary House Rent allowance : Rs. 18,000 Transport Allowance : Rs. 5,000 Medical Reimbursement : Actual expenses up to Rs. 1,250 per month Executive Allowance : Rs. 10,000

Couple’s Current Assets & Liabilities (As on 31st March, 2017) Assets: House : Rs. 75.00 lakh (Current market value, purchase cost Rs. 40 lakh) Car : Rs. 4.00 lakh (Depreciated value) Public Provident Fund - PPF1 : Rs. 4.90 lakh Insurance – Money Back policy2 : Rs. 3.00 lakh (Sum assured) Child Plan – Life insurance3 : Rs. 12.00 lakh (Sum Assured) Gold ornaments4 : Rs. 4.50 lakh Equity Mutual Fund schemes5 : Rs. 7.85 lakh Portfolio of Equity Shares6 : Rs. 3.95 lakh Bank fixed deposits7 : Rs. 4.00 lakh (Principal, in Angela’s name from her business income) Bank account – Roger : Rs. 0.75 lakh Bank account – Angela : Rs. 0.95 lakh Liabilities: Home loan8 : Rs. 17.85 lakh (Principal outstanding) Car Loan9 : Rs. 3.05 lakh (Principal outstanding)

1 Opened in December, 2011 in the name of Roger 2 Purchased on 25th October, 2013; annual premium paid Rs. 14,798; 20-year policy with 20% of sum assured payable on survival on 5th, 10th and 15th years and the balance on maturity 3 Purchased when Mark was 2 year old; term of 15 years; annual premium Rs. 41,374 4 Gifted on marriage in November 2011 at then value Rs. 1.75 lakh. 5 Three schemes; current assets value in one scheme is Rs. 2.5 lakh, in second Rs. 3.5 lakh with monthly Systematic Investment Plan (SIP) of Rs. 10,000; the third is Equity Linked Saving scheme, invested Rs. 1 lakh in March 2015 6 The Demat account in which Roger and Angela are respectively first and second holders was started in 2013 7 Three deposits; Rs. 2 lakh made on 1-July-2014 for 3 years at 9.75% p.a., Rs. 1 lakh made on 1-July-2015 for 2 years at rate 9.25% p.a. and Rs. 1 lakh made on 1-July-2016 for 1 year and 1 day at 8.75% p.a. (interest is compounded quarterly and is cumulated to be received on respective maturities) 8 Home loan of Rs. 24 lakh for a 15-year term taken in April, 2011 at rate of interest fixed for first 3 years at 10% p.a., and floating thereafter at 1.5% above RBI Repo rate. 9 Car loan of Rs. 5.5 lakh taken in April, 2015 at a fixed interest of 11% p.a. for a 4-year term; Car cost Rs. 8 lakh.

217

Goals:

1. Accumulate in a fund, higher education expenses of Mark and Stephanie. Expenses at their respective age of 18 years are Rs. 4 lakh p.a. (current cost) required for four years, cost escalation 8% p.a.

2. Marriage expenses of Rs. 10 lakh (current cost) for each child at around their respective age of 25 years, cost escalation 9% p.a.

3. Retirement corpus at Roger’s age of 58 years to sustain 70% of pre-retirement household expenses, inflation adjusted, till his lifetime and 70% of then expenses till Angela’s expected life.

4. A bigger house valued at Rs. 1 crore today, 5 years from now by disposing of the current house and foreclosing the loan. 5. Build a separate fund for vacation expenses of Rs. 1.5 lakh p.a. (current cost), first expenses to be drawn after 5 years

and thereafter every year continuing up to the year of Roger’s retirement, cost escalation 7% p.a. A suitable lump sum is to be invested immediately followed by an investment regime.

Life Parameters:

Roger’s expected life : 75 years Angela’s expected life : 80 years

Assumptions regarding pre-tax returns in various asset classes:

1) Equity & Equity MF schemes/ Index ETFs 2) Balanced MF schemes 3) Bonds/Govt. Securities/ Debt MF schemes 4) Liquid MF schemes 5) Gold and linked investments 6) Real Estate appreciation 7) Bank/Post Office Term Deposits ( > 1 year) 8) Public Provident Fund/EPFO

Assumptions regarding economic factors:

1) Inflation 2) Expected return in Risk free instruments

Cost Inflation Index:

FY CII FY CII FY CII FY CII FY CII

2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264

: 11.00% p.a. : 9.50% p.a. : 7.50% p.a. : 6.00% p.a. : 6.00% p.a. : 6.50% p.a. : 7.25% p.a. : 7.75% p.a.

:

5.00% p.a.

: 5.50% p.a.

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Questions:

1) Before beginning work on Roger’s Financial Plan, you have drafted a document outlining the “Scope of Engagement” and sought Roger to mutually define and determine the activities that may be necessary to pursue. Roger asked you about relevance of such a document. In the context of Financial Planning Profession, you explain about the “Letter of Engagement” as a .

[2 marks]

A. professional requirement under Code of Ethics of FPSB India B. professional requirement under Practice Guidelines of FPSB India C. necessary legal requirement as per Contract Act 1872 D. document for his personal record

2) You have finished analysis of Roger’s financial situation and risk profile. Which of the following is the next appropriate step in the financial planning?

[2 marks]

A. Specify financial goals which can be achieved within Roger’s financial situation based on the information collected

B. Fix the scope of engagement based on the available information already collected C. Consider such assumptions of investment returns, inflation, tax rates, etc as to maximize the chances of

achieving Roger’s goals D. Identify other issues that may potentially impact Roger’s ability to achieve financial goals

3) Roger wants to estimate the amount of finance needed to buy the proposed new house after 5 years. This could

be arrived at by utilizing the net amount from the sale proceeds of his existing house after 5 years. The outgoings from such proceeds would be the outstanding loan amount and a sum of Rs. 10 lakh towards meeting capital gains tax liability on existing house and the statutory charges, etc. You expect the average Repo rate of 6.5% to be maintained by RBI over the next 5 years. The quantum of loan required could be .

[3 marks]

A. Rs.75 lakh B. Rs. 60 lakh C. Rs. 54 lakh D. Rs. 37 lakh

4) You give a quick look at the assets and liabilities of the couple, and before drawing a comprehensive picture of

adequate insurance protection and a strategy to achieve the same, you suggest to take cover on an immediate basis, which is .

[2 marks]

A. They must take Mortgage Redemption Insurance or an equivalent term insurance to cover outstanding loans B. They must take Accident Insurance C. They must take Critical illness insurance D. They must take Unit Linked Insurance Policies for their financial goals

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5) You compute the value of additional life cover for Roger by considering 80% of the current household expenses, (inflation adjusted) up to Angela’s age of 55 years and further 80% of then expenses inflation-linked for the remaining period of her expected life by considering investment in debt MF schemes. This cover required to be taken as term insurance exclusive of the sum assured under current insurance policies comes to .

[3 marks]

A. Rs. 120 lakh B. Rs. 135 lakh C. Rs. 220 lakh D. Rs. 105 lakh

6) Roger’s ideal life cover has to be estimated which in case of any exigency will first repay the outstanding loans and the remaining would be invested along with the couple’s existing financial assets. Such combined corpus would be invested in a 7.5% p.a. return instrument to sustain the family’s living expenses and the specific financial goals of higher education of their children. The living expenses need to be taken as inflation-adjusted to the extent of 80% of their present household expenses for 50 years. What should be this ideal cover?

[4 marks]


7) Roger and Angela wish their retirement corpus, as per proposed goal, to also have a provision of gifting Rs. 50 lakh to each of their children and an additional Rs. 25 lakh towards charity to an Old Age Home at Roger’s age of 70 years. The sums are at absolute values then. They also wish to provide in the corpus an additional Rs. 10,000 per month (current costs) towards healthcare after Roger’s age of 70 years. You estimate the required corpus, considering the same shall be invested in investment yielding 6.5% p.a., to be .

[3 marks]

A. Rs. 3.53 crore B. Rs. 3.20 crore C. Rs. 3.78 crore D. Rs. 3.67 crore

8) You sensitize on the post-retirement parameters considered as: investment return 6.5% p.a., inflation 5% p.a., and the specified longevity as you work out retirement corpus. You stress test the same as: investment return 6% p.a., inflation 5.5% p.a., increased longevity of Roger by 5 years and of Angela by 2 years, and no further curtailment after Roger’s death. You work out the revised corpus. What additional funds need to be accumulated by Roger’s retirement age? Alternately, by what percentage the retirement expenses should be curtailed to retain this cushion?

[5 marks]

A. Rs. 57 lakh; 44% curtailment B. Rs. 14 lakh; 33% curtailment C. Rs. 129 lakh; 55% curtailment D. Rs. 26 lakh; 36% curtailment

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9) You inform Roger and Angela about the recent vehicle of taking exposure to Gold, which is Sovereign Gold Bonds (SGB). Which of the attributes about the SGB is CORRECT?

[2 marks]

A. The Capital Gains on redeeming these bonds on maturity are exempt from income tax B. They work like zero-coupon bonds C. The quoted prices of SGBs currently are very close to ruling Gold prices D. The redemption price on maturity is guaranteed not to be below the issue price of the respective SGB

10) Towards the marriage goal of the children, you suggest Roger to make maximum permissible subscriptions to his

PPF account towards the end of every financial year and extend the account twice beyond initial maturity for terms of 5 years each with similar subscriptions. The third term of 5 years is continued without further contribution. Roger shall withdraw about 50% of accumulation for the marriage expenses of mark and the remaining for the marriage expenses of Stephanie. What are the expected individual withdrawals and shortfalls in meeting the marriage expenses?

[4 marks] A. Mark Rs. 51.5 lakh, 16% shortfall; Stephanie Rs. 64.8 lakh, 18% shortfall B. Mark Rs. 47.7 lakh, 22% shortfall; Stephanie Rs. 59.7 lakh, 24.5% shortfall C. Mark Rs. 52.3 lakh, 14% shortfall; Stephanie Rs. 65.9 lakh, 17% shortfall D. Mark Rs. 45 lakh, 26% shortfall; Stephanie Rs. 56.7 lakh, 28% shortfall

11) Roger and Angela will set aside immediately a sum of Rs. 10 lakh towards setting up a fund for vacation. They will start contributing annual investments beginning April 2018 till Roger’s age of 55. The annual investment will be doubled after 14 such investments. You devise an asset allocation for the vacation fund to yield 11% p.a. for the first 15 years and 9.5% p.a. thereafter. What should be the amount of initial annual investment?

[5 marks]

A. Rs. 1,75,500 B. Rs. 123,600 C. Rs. 97,900 D. Rs. 115,300

12) For the higher education expenses for Mark and Stephanie, Roger starts accumulating funds with monthly

investment of Rs. 20,000 in an aggressive asset allocation yielding 12% p.a. After 7 years the allocation is moderated to yield 10% p.a. and while the investment is raised to Rs. 40,000 p.m. After 12 years, the funds accumulated are shifted to suitable debt instruments from which distribution towards higher education is made as proposed. What excess/shortfall of funds you expect after 12 years by following this investment strategy?

[5 marks]

A. Shortfall Rs. 28.16 lakh B. Shortfall Rs. 10.12 lakh C. Excess Rs. 7.60 lakh D. Excess Rs. 12.48 lakh

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13) Roger asks for your guidance regarding different modes of tax efficient estate planning which can help in creating and distributing family assets. You opine that a Trust would be a more appropriate option because .

[2 marks]

A. there is no taxation applicable on trust income B. they have fixed rate of tax which is far lower than tax rates for individual assessees C. future capital gains tax on assets transferred to trust could be lower D. all future earnings from assets transferred to trust are exempt

14) Roger invested Rs. 4 lakh on 20th September 2016 in an Equity Mutual Fund scheme at NAV of Rs. 28.273 per unit.

The scheme declared dividend of Rs. 5 per unit, the Record Date being 4th December 2016. The prevailing NAV of the scheme is Rs. 22.367 per unit. If he sells all the units of the scheme today, what would be the implication of this transaction in his IT return of AY 2018-19?

[3 marks]

A. Rs. 12,818 short term capital loss to be set off against capital gains in AY 2018-19 or carried in 8 subsequent

years B. Rs. 83,557 short term capital loss to be set off against capital gains in AY 2018-19 only C. Rs. 83,557 short term capital loss to be set off against capital gains in AY 2018-19 or carried in 8 subsequent

years D. Rs. 12,818 short term capital loss to be set off against capital gains in AY 2018-19 only

15) Roger wants to invest the maturity proceeds of all his fixed deposit investments in the 2.50 %-SGB (Sovereign Gold

Bonds) of a series quoted at Rs. 2,660 per bond, at a discount of 7.3% to their issue price (issue date: 18-July- 2016). Roger wishes to hold SGBs till maturity. Calculate the impact of taxation in the AY2018-19 in respect of these transactions if the SGBs could be bought at the quoted rate when FDs mature. Also evaluate capital gains on maturity in the 8-year tenure of these SGBs, if on maturity Gold price in its purest form is expected at Rs. 4,000 per gram. (CII expected in the year of maturity may be considered as 348).

[5 marks]

A. Rs. 1,31,556 "Income from Other Sources" in AY2018-19; Capital gains of 1,14,030 on maturity B. Rs. 1,31,556 "Income from Other Sources" in AY2018-19; Capital gains on maturity shall be tax-exempt C. Rs. 24,745 "Income from Other Sources" in AY2018-19; Capital gains on maturity shall be tax-exempt D. Rs. 29,477 "Income from Other Sources" in AY2018-19; Capital gains of 1,37,853 on maturity

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Case 2: Ms. Urvashi (Reference Date: 1st April, 2017)

Ms. Urvashi, aged 34 years, is employed in a senior position in a Mumbai-based firm. She has a son Suryansh aged 14 years and a daughter Dhruvi aged 9 years. She is the sole guardian of her children pursuant to her recent divorce. She is currently residing in a rented house. Suryansh has just passed 8th standard while Dhruvi is studying in 3rd standard. She has approached you, a CFPCM practitioner, for preparing a Financial Plan for her family. She has plans to retire early from service at her age of 55 years. She shares the following financial information with you: Salary Income (2017-2018)

Basic Salary : Annual (Rs. lakh) 25.00

Employer’s contribution to NPS : 2.50 HRA : 5.00 Other allowances and reimbursements : 3.00

Regular Outgoings: Monthly (Rs.) Basic Household Expenses : 40,000 Services availed : 18,000 School Fees : 25,000 House Rent : 35,000 Power, Telecom & Fuel : 12,000 Car Loan EMI : 18,275

Outgoings towards investment and insurance: (Rs.) Equity Mutual Fund1 : 25,000 (Systematic Investment Plan - SIP) Debt Mutual Fund2 : 15,000 (Systematic Investment Plan - SIP) Insurance Premium3 ` : 38,759 Health Insurance Premium4 : 27,631 Car Insurance Premium : 8,637

Assets: (Valued on 31st March, 2017) (Rs. lakh) Equity Mutual Fund schemes : 15.45 Debt Mutual Fund schemes : 5.79 Equity Shares in Demat Account : 23.92 Equity Linked Saving Scheme5 : 3.85 Public Provident Fund (PPF) A/c6 : 6.59 Gold & Diamond Jewellery : 10.75 Car7 : 4.50 Bank Account (Salary) : 3.82 Fixed Deposits8 : 6.00 Deposit with House Owner : 3.00

1 Diversified open-ended growth equity schemes; started 3 years ago with initial investment of Rs. 1 lakh; monthly SIP 2 Long-term long duration debt schemes with growth option, started 2 years ago, initial investment of Rs. 1 lakh; monthly SIP 3 Total Cover Rs. 1.5 crore across three policies of Rs. 50 lakh each, all term plans having cover up to Urvashi’s age of 50, 53 and 58 year respectively; annual premium 4 Total cover Rs. 20 lakh on two policies, one is floater Rs. 10 lakh cover, the other in Urvashi’s name; annual premium 5 Invested Rs. 1 lakh in each of the previous three financial years in March every year 6 Account opened on 21st December 2009 7 Purchased on 1st March 2014 by availing a loan for Rs. 10 lakh (80% loan to value, 6-year, 9.5% p.a.) 8 Six Fixed Deposits each of Rs. 1 lakh at 7.75% p.a. interest, maturing on 1st date of months from April to September 2017, all deposits created from 15th September 2015 to 20th October 2015 on weekly intervals

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Liabilities: (Outstanding on 31st March, 2017) (Rs. lakh)

Car loan : 5.70

You, in consultation with Urvashi, have crystallized the following financial goals, for which the strategy is to be devised and presented to Urvashi:

1. Purchase a house in the next three years costing currently Rs. 1.25 crore; provide for own funds, transfer and stamp duty expenses to the extent of 30% of market value

2. Create a pool account and manage the same to plan for basic education of both children till their respective 18 years of age; current costs are Rs. 1.5 lakh p.a. till age 14 and Rs. 2 lakh p.a. thereafter till age 18, such expenses escalate at 10% p.a.

3. Create a corpus for higher education of both children at their respective age of 18 years; Rs. 25 lakh is the outlay in current terms for each child, such costs escalate at 8% p.a.

4. Create a combined corpus for the professional courses to be pursued by children with current outlay of Rs. 25 lakh each required at their respective age of 22 years, such costs escalating at 9% p.a., such corpus sustaining till the marriage of both the children tentatively at their respective age of 27 years; marriage costs at Rs. 20 lakh per marriage, escalating at 7% p.a.

5. Retirement Corpus for post-retirement income stream equivalent to 60% current expenses arrived at by omitting rent, EMI and school fees and considering provisions for gifting a lump sum (value then) Rs. 1 crore combined to her children when Urvashi attains 75 years of age; a further provision of donating lump sum (value then) Rs. 1 crore to a charitable trust on reaching age 85.

6. Create a fund in 10 years for a family world tour at an estimated Rs. 10 lakh at current costs, such costs escalating at 5% p.a.

Life Parameters: Urvashi’s expected life currently estimated : 85 years



Assumptions regarding economic factors: 1) Inflation 2) Expected return in Risk free instruments

Cost Inflation Index: Questions:


2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264

2


: 5.00% p.a. : 5.50% p.a.

211

1) Urvashi asks if you can show her the actual financial plan made of another client. Under which of the following Code of Ethics you are prohibited to reveal one client’s details to others.

[2 marks]

A. Code of Ethics of Professionalism B. Code of Ethics of Fairness C. Code of Ethics of Confidentiality D. Code of Ethics of Integrity

2) You have just defined and discussed with Urvashi the basic terms of the financial plan construction. As

per Financial Planner Practice Standards, what should be your next logical step?

[2 marks]

A. To inform Urvashi about the terms of the engagement B. To collect the quantitative and qualitative information of Urvashi C. To define the financial goal of Urvashi D. To apprise Urvashi of your expertise in certain areas to elicit her goals accordingly

3) Urvashi wishes to avail housing loan to the extent of 70% of the value of the desired house in the next 3

years. She wants to fully repay the loan by the time she intends to retire. You consider 8.5% p.a. as the average interest rate on the housing loan to be availed. She asks you by how much EMI on the loan would exceed her current monthly outgo towards house rent.

[3 marks]

A. Rs. 103,653 B. Rs. 44,228 C. Rs. 56,353 D. Rs. 60,703

4) Looking at Urvashi’s various insurance policies and the coverage they provide, what is the most

appropriate conclusion from the following? [2 marks]

A. Urvashi needs to take cover against disability and critical illness as she is the only earner in the family; other risks are well covered.

B. Urvashi has to take personal accident cover which is required as she drives her own car. C. Urvashi’s life cover falls drastically after 53 years of age, she needs additional coverage till 60 years of

her age. D. Urvashi needs comprehensive householder policy considering that she is single parent, is employed

and is with small children.

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212

5) Urvashi wants to create a Trust that would receive a corpus, in case of any eventuality with her life, towards: (A) a Rs. 1 crore worth house to accommodate both children; (B) their living expenses, inflation- adjusted, currently estimated at Rs. 9 lakh annually till Dhruvi attains 27 years of age. The expenses are supposed to be drawn from Debt instruments. Estimate additional insurance cover required to achieve this. [3 marks]


6) Urvashi’s net contribution to family in the year 2017-2018 would be after an estimated tax of Rs. 7.5 lakh

and 25% of such post-tax income on own consumption. This contribution is expected to increase at 5% p.a. in her service tenure. You estimate Urvashi’s income replacement considering investment yield of 8.5% p.a. What additional life cover would be needed?

[4 marks]

A. Rs. 1.16 crore B. Rs. 52 lakh C. Rs. 1.90 crore D. Rs. 1.45 crore

7) You initially arrived at Urvashi’s retirement corpus to be accumulated by considering household

consumption at current level including services availed, power, telecom, etc. up to her expected life; the corpus invested at 7.5% p.a. yield with average inflation at 5% p.a. On a conservative note, at investment yield of 6.5% p.a. and 5 more years of expected life, what curtailment of expenses in the first year of retirement would be needed?

[3 marks]

A. 22% curtailment B. 12% curtailment C. 14% curtailment D. 10% curtailment

8) Urvashi’s retirement corpus as per goal needs to be accumulated by utilizing the Demat account holding

along with a separate asset allocation fund. She will invest 70:30 in Equity:Debt for 10 years in this fund by beginning immediately a monthly SIP. After 10 years, the accumulated amount in asset allocation fund and the subsequent monthly investments are rebalanced 40:60 in Equity:Debt for the next 6 years. After initial 16 years, the accumulations in asset allocation fund along with Demat account holdings are redeemed and transferred to a designated retirement fund yielding 6.5% p.a. The quantum of monthly investments maintained in the initial 16 years shall be doubled in the last 5 years, that is, up to retirement. This retirement fund is used for drawing expenses post-retirement. What quantum of initial monthly investment is required?

[5 marks]

A. Rs. 30,500 B. Rs. 63,200 C. Rs. 29,310 D. Rs. 32,100

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213

9) Urvashi has recently heard about Inflation Indexed Bonds (IIB). She is not convinced about the real annual yield of just 1.5% in a recently issued IIB. You explain the features of such Bonds as .

[2 marks]

A. The principal amount is protected on maturity, and is repaid inflation adjusted. The annual coupons would be 1.5% of such periodically adjusted principal amount in tune with inflation index.

B. The principal amount would be repaid on maturity just like other bond issues. The annual coupons would be paid at annual inflation rate plus 1.5%.

C. The inflation adjusted principal would be repaid on maturity. The annual coupons however would be 1.5% of the face value of the bond.

D. The principal amount would be repaid on maturity just like other bond issues. The annual coupons would be 1.5% above the cumulative percentage rise in inflation index measured annually.

10) For accumulating funds for the goal of world tour, you suggest investing the maturity proceeds of each of the bank fixed deposit on the respective maturity dates in an asset allocation fund. The accumulated amount from this fund is switched to Risk free instruments three years prior to the actual usage for the purpose. What return needs to be generated from the asset allocation fund to achieve the goal?

[4 marks]

A. 11% p.a. B. 7.5% p.a. C. 13.25% p.a. D. 14.6% p.a.

11) Urvashi utilizes fund in her PPF account for creating a combined corpus to meet the professional course

expenses of Dhruvi and later to meet her marriage expenses. She would invest Rs. 1.5 lakh in the beginning of every financial year, starting immediately, in the PPF account and extend the account for a term of 5 years with the same discipline of investment. A lump sum equivalent to 50% of the professional course charges then is withdrawn from the PPF account after which it is extended for one more term of 5 years without further contributions. What percentage of sum required for Dhruvi’s marriage would be available on the final maturity of the account?

[5 marks] A. 57% B. 28% C. 45% D. 71%

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214

12) The cash flows required for the basic and higher education expenses of her children are managed in a pool account of existing equity and debt MF schemes. They have current year provisions. You advise to switch today suitable lump sum from Equity to Debt schemes so that Debt schemes withdrawal on yearly basis is enough to meet next 3 installments of basic education expenses of Suryansh and Dhruvi. After 4 years, you again switch from Equity to Debt schemes funds equivalent to Dhruvi’s remaining years’ basic education expenses. You utilize the remaining balance in Equity schemes to meet in one lump sum Suryansh’s higher education expenses. Consider expenses required for a year to be withdrawn at the beginning of the year. What incremental SIP in Equity MF schemes needs to be started immediately to ensure this strategy works?

[5 marks]

A. Rs. 12,860 per month B. Rs. 19,050 per month C. Rs. 16,270 per month D. Rs. 15,120 per month

13) Urvashi, in case of her life contingency, is apprehensive about managing the affairs of her children. You

advise her to set up a common Minor Beneficiary Trust for Suryansh and Dhruvi. You put forth the argument in favour as:

[2 marks]

A) Such a Trust shall protect assets transferred and shall manage them as per guidelines issued to the trustee until either or both of her children reach/es a specified age to be defined by Urvashi

B) Such a Trust shall protect and manage assets for her children only until they individually reach majority, i.e. 18 years of age

C) Such a Trust shall not take further resources/assets/inheritances once the benefits have been transferred to it and the guidelines specified by Urvashi for their use

D) Such a Trust shall strictly prevent early distribution of assets before both Suryansh and Dhruvi attain majority, i.e. 18 years of age

14) Urvashi has decided to sell gold jewellery worth Rs. 11 lakh in April 2017. This was acquired for Rs. 2.15

lakh in FY 2003-04. She wishes to invest the proceeds of such sale after deducting tax in 2.50%-SGB (Sovereign Gold Bonds). These SGBs quote at Rs. 2,800 per bond, at a discount of 8.5% to their issue price (issue date: 28-June-2016). How these legs of transactions will reflect in her IT Return for AY2018-19?

[3 marks]

A. Long term capital gains of Rs. 5,63,486 ; Income from other sources Rs. 26,852 B. Long term capital gains of Rs. 5,63,486 ; Income from other sources Rs. 30,055 C. Long term capital gains of Rs. 8,85,000 ; Income from other sources Rs. 27,500 D. Long term capital gains of Rs. 5,82,478 ; Income from other sources Rs. 28,414

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15) Urvashi contributes 10% of her Basic Salary to the National Pension System (NPS) Tier 1 account. Her employer also matches this contribution as 10% of her Basic Salary. She additionally contributes every year Rs. 50,000 in NPS Tier 2 account. Consider the interest on Savings Bank Account as Rs. 20,000 and that on Fixed Deposit as Rs. 25,000 during FY 2017-18. She intends to immediately buy Sovereign Gold Bonds (SGB) units for Rs. 10 lakh in a 2.5%-SGB series (issued in June 2016, with coupons payable half- yearly in June and December). The SGBs currently quote at Rs. 2,800 per unit, at a discount of 8.5% to its issued price. Calculate her income tax liability for AY 2018-19.

[5 marks]

A. Rs. 6,46,520 B. Rs. 7,23,770 C. Rs. 6,85,150 D. Rs. 7,46,510

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Case – A:

(Reference date: 1st April, 2017)

Ashwin, aged 34 years, is employed with an oil exploration company since December 2003. He is an engineer by profession and is part of project team that manages oil rigs worldwide. He has to tour extensively in different parts of the world in connection with the company’s projects. He has approached you, a CFPCM practitioner, for preparing his Financial Plan. He is staying in his own house at Vadodara. His wife Sumedha, aged 31 years, is working in a private sector bank as Manager. They have a son Prateek aged 4 years, and a year old daughter Aslia. The family’s monthly house hold expenses are Rs. 70,000 p.m. (excluding EMI on loans and insurance premium). Ashwin’s parents stay in their ancestral house at Bikaner. His father is engaged in a small business.

Ashwin’s monthly salary (FY 2017-2018)

Basic Salary : Rs. 60,000 Dearness Allowance1 : 50% of Basic salary House Rent allowance : Rs. 15,000 Transport Allowance : Rs. 7,500 Medical Reimbursement : Actual expenses up to Rs. 1,250 per month Entertainment Allowance : Rs. 7,500 PF & Superannuation : 12% of Basic Salary

Sumedha’s monthly salary (FY 2017-2018)

Basic Salary : Rs. 40,000 Dearness Allowance : 30% of Basic salary House Rent allowance : Rs. 10,000 Transport Allowance : Rs. 1,600 Executive Allowance : Rs. 7,500 PF & Superannuation : 12% of Basic Salary

Couple’s Assets & Liabilities (As on 31st March, 2017)

Assets: (In Rs. lakh) House : 75.00 (municipal value) Car : 3.50 (depreciated value) PPF (maturity on 1st April 2024): 6.20 (account balance in Ashwin’s name) Insurance – Money Back policy2 : 4.00 (sum assured) Child Plan – Life Insurance3 : 20.00 (sum assured) Gold ornaments : 6.50 (valued 22 karat less 10%)

1 100% of DA received forms part of salary for retirement benefits; DA not part of PF contribution 2 Ashwin purchased the 20-year policy on 18th November, 2010; annual premium Rs. 26,864; 20% of sum assured (SA) payable on survival each on expiry of 5th, 10th and 15th years and 40% of SA payable with accrued bonuses on survival of the term 3 Purchased by Ashwin on the life of Prateek on his 3rd birthday for a term of 20 years; annual premium Rs. 44,347

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Sovereign Gold Bonds4 : 2.90 (quoted value) Equity Mutual Fund schemes5 : 11.87 lakh Balanced Mutual Fund scheme : 3.28 lakh Debt Mutual Fund Schemes6 : 7.67 lakh Portfolio of Equity Shares : 18.32 lakh Term deposits : 3.50 lakh (in Sumedha’s name) Cash/Bank Balance : 2.25 lakh (cumulatively in accounts of Ashwin and Sumedha)

Liabilities: (In Rs. lakh) Home loan7 : 15.40 Car Loan8 : 2.77

Goals: 1. To provide for higher education of Prateek and Aslia. The expenses, at current cost, required for

each child for 4 years; Rs. 8 lakh at their respective age of 18, and Rs. 3 lakh p.a. for 3 subsequent years; cost escalation 8% p.a.

2. Marriage expenses of Rs. 20 lakh (current cost) for each child at their respective age of 27 years; cost escalation for such expenses is 8% p.a.

3. Retirement corpus at Ashwin’s age of 60 to sustain the same lifestyle till their expected life time. 4. A bigger house 3 years from now, valued at Rs. 1.40 crore today. 5. To start building a separate dedicated fund for annual vacation expenses of Rs. 2 lakh (current

cost) to be utilized during 15 years to Ashwin’s retirement; cost escalation 8% p.a.

Life Parameters:

Ashwin’s expected life : 80 years Sumedha’s expected life : 82 years

4 Sumedha purchased 100 units @Rs.3,150 in September 2016 Series, maturity date 30-Sep-2024, coupon @2.75% p.a. payable half-yearly on 30-Mar and 30-Sep every year

5 Four schemes out of which one is diversified large cap growth fund (Rs. 5.71 lakh), one is mid-small cap fund (Rs. 3.83 lakh), and two are sector specific funds on Banking (Rs. 1.26 lakh) and Information Technology (Rs.1.07 lakh)

6 Two schemes, one is short term debt fund in Growth option (current value Rs. 2.59 lakh) acquired through Rs. 10,000 monthly SIP continued for 2 years, the last SIP on March 1, 2017; the other is Gilt fund subscribed in New Fund Offering (May 20, 2014) for Rs. 2 lakh in Growth option with further contributions of Rs. 1 lakh each on Feb 11, 2015 and on June 17, 2016

7 Home loan of Rs. 20 lakh taken on 1st November, 2011 to acquire a house of 1050 sq.ft. built up area valued at Rs. 40 lakh then. Loan details: fixed interest of 8% p.a., tenure 15 years, first EMI paid on 1st December, 2011. Loan shared in 60:40 ratio, major share by Ashwin 8 Car loan of Rs. 5 lakh taken on 1st April, 2015 at a fixed interest of 11% p.a. for a 4-year term. First EMI paid on 1st April, 2015.

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2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264


:

5.00% p.a.

: 5.50% p.a.

Prepared by: Harminder Garg, CFPCM Em21a9il : [email protected] www.iifcedu.in

Ashwin Case Study: Questions

1. Ashwin needs your help to plan his retirement. He wants to plan a comfortable retirement for himself and his wife Sumedha for thier entire lives. For this purpose, he wants to use his current investments in the balanced fund and also invest a fixed amount in his balanced fund at the begining of every month. Post retirement he will switch over all his investments to debt. It is estimated that he will not be incurring any expenses for EMI's or Insurance premium post his retirement. What amount should Ashwin Invest at the beginning of every month.? a. 41676 b. 37621 c. 28400 d. 34408 2. Ashwin has decided to make quarterly investments in Equity MF's for his children's education. He also wants to equally divide the current corpus in Equity MF for this purpose. However, one year before from the first-time requirement of money in respective A/c required all the money will be shifted into risk free instruments and no further investments will be made. There after the corpus will continue to be invested in risk free instruments only. What amount will Ashwin need to invest for Prateek & Aslia in the allocated A/c’s to achieve the goal? a. Prateek 23800 and Aslia 18995 b. Prateek 22765 and Aslia 17695 c. Prateek 20965 and Aslia 15605 3. Ashwin decides to make an investment of Rs. 20,000 in PPF every quarter starting from 1st Apr 2017. On maturity on the account Ashwin intends to extend it for 2 blocks of 5 years, but no investments will be made in this extended period. what will be the final maturity value of the account?

a) 4817871 b) 3771406 c) 2886570 d) 3059871

4. Ashwin intends to create a dedicated fund for annual vacations goal. For this purpose, he intends to use his equity share portfolio and also invest a fixed amount every month in an Equity & a debt mutual fund till his first withdrawal. Ashwin will invest in the ratio of Equity Debt ratio of 80:20 for first 5 years, rebalance accumulated amount in new asset allocation ratio of Equity Debt 60:40 and invest in same ratio for next 3 years and rebalance accumulated amount in new asset allocation ratio of Equity Debt 50:50 and invest in the same ratio till first withdrawal. At the time of first withdrawal, you asked Ashwin to shift entire portfolio in balance mutual fund scheme. What is the monthly investment amount to achieve this goal?

a) 4,820 b) 3730 c) 2861 d) 2565





5. Ashwin wants to estimate the amount of finance needed to buy the proposed new house after 3 years. This could be arrived at by utilizing the net amount from the sale proceeds of his existing house after 3 years. The outgoings from such proceeds would be the outstanding loan amount and a sum of Rs. 5 lakhs towards meeting capital gains tax liability on existing house and the statutory charges, etc. The quantum of loan required for a new house could be . (Assume Municipal value of house is equal to market value & no change in home loan interest rate

a. 95,22,527 b. 94,68,758 c. 96,50,808

6. Ashwin want to know annual investment required to build retirement corpus. Post -retirement 30% curtailment in expenses required, investment in debt portfolio & corpus to be build till Sumedha’s expected life span. Ashwin require total Rs. 1.5 Cr then value at Ashwin’s age 70 for charity. You have suggested below asset allocation for investment 1st 12 years in the ratio of 80% Equity MF and 20% Gold ETF, thereafter double the investment amount to next 12 years in ratio of 60% Equity MF and 40% Gold ETF; thereafter at age 58 shift entire accumulated amount into risk free rate investments & stop regular annual contribution. You also advise Ashwin to rebalance the portfolio after the interval of 6 years starting from today in the ratio of Equity MF: Gold ETF 70:30 till age 58. a. 3,92,570 b. 3,83,323 c. 3,81,550 d. 3,69,176

7. Ashwin want to know annual investment required to build retirement corpus of Rs. 4 Cr. He will increase his annual investment 7% P.A. as per his income growth till his retirement. You have suggested below asset allocation for investment 1st 13 years in the ratio of 80% Equity MF and 20% Debt MF, thereafter double the investment amount to next 13 years in ratio of 60% Equity MF and 40% Debt MF. a. 118,730 b. 183,430 c. 186,000 d. 184,500




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Case – B: (Reference Date: 1st April 2017)

Gurpreet, aged 43 years, having twins Roshan and Geet of age 14 years, is a software engineer in a company based in Mumbai. His spouse passed away recently. Both his children study in the 8th Standard. His average monthly household expenses are Rs. 1.40 lakh, which include rent of Rs. 45,000 on the rented apartment, but exclude car loan EMI and all insurance premiums. He has approached you, a CFPCM practitioner, for preparing a financial plan for his family. He has shared the following financial information with you:

Gurpreet’s Assets & Liabilities (As on 31st March, 2017)

Assets Equity MF schemes portfolio :

(Rs. Lakh) 26.47

Balanced MF schemes portfolio : 9.78 Equity shares portfolio1 : 55.92 Gold Jewelry : 2.17 Gold ETF2 : 3.21 PPF A/c.3 : 7.87 Equity linked savings scheme (ELSS )4 : 22.75 Physical Gold (coins/bars) : 11.25 Car : 4.80 Liquid fund scheme : 10.25 Corporate bonds of M/s.XYZ Ltd.5 : 8.50 Bank account – Gurpreet6 : 103.25

Liabilities (Rs. Lakh)

Car loan7 : 5.01 Credit Cards : 0.72

Salary Income (Annual) (Rs. lakh) Basic Salary : 30.00 Dearness Allowance : 9.00 HRA : 4.80 Special Allowance : 0.90 Variable Salary (Bonus) : 6.00 Employers’ contribution to PF : 3.60

1 Securities at cost Rs. 35.62 lakh. Last purchase made in March, 2016 2 Invested Rs. 1.6 lakh on 17 July 2006 in the NFO of Gold ETF 3 Account maturing on 1st April, 2023 4 Invested Rs. 1,00,000 every year for 6 years from 2005 to 2010 5 Investment in 5-year bonds is stated at face value, purchased on Issue on August, 18, 2013; coupon rate 11% p.a. payable half-yearly on 1st October and 1st April every year 6 Received Rs. 80 lakh towards insurance claim on the life of his deceased wife 7 Taken in August 2015 at 11% p.a. on reducing monthly balance basis for a term of 4 years

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Other cash outflows (Annual) (Rs.)

Term Plan Insurance premium : 62,857 (Total Cover Rs. 1.50 crore) Endowment Insurance premium8 : 1,75,527 (Sum assured Rs. 30 lakh) Health Insurance Premium : 27,631 (Annual – 2 policies/ Total cover

Rs. 20 lakh) Goals:

You, in consultation with Gurpreet, have crystallized the following financial goals for his family and the preliminary Roadmap to achieve them:

1. Send both the children to a Boarding School immediately – Outlay Rs. 5.15 lakh per child per annum – for 4 years – To be met year on year basis by investing a suitable corpus today.

2. Buy a house – within one year – Outlay of Rs. Rs. 1.50 crore – Take a loan not exceeding Rs. 50 lakh with full repayment coinciding with retirement.

3. Send Roshan for Higher Education abroad after he completes boarding education. The estimated outlay is Rs. 1.50 crore then.

4. To send Geet for a course in fashion technology of 4 years duration after she completes boarding education. The current cost is Rs. 10 lakh per year, escalating at 8% p.a.

5. Retirement Corpus – To be accumulated in 17 years – Corpus to sustain inflation-adjusted income equivalent to current Rs. 80,000 monthly for 25 years post-retirement.

6. Undertake a World Cruise Trip with both children on their completing higher education/ professional course. The Trip costs in US Dollars 50,000 per person at current exchange rate of 66.76 INR/USD. Average annual Rupee depreciation vis-à-vis USD of 2% and cost escalation of Trip at 3% p.a. is expected.

7. To accumulate funds for marriage of his children, each marrying sometime after their respective age of 25. Each marriage costs today Rs. 25 lakh, such costs escalate by 7% p.a.

8. Suitable Estate Planning to cover all his physical and financial assets.

Life Parameters

Gurpreet’s expected life : 85 years





8 Term of 20 years, Purchased on 15th March, 2007.


:

5.00% p.a.

: 5.50% p.a.

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2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264


Gurpreet Case study: Questions 1. Gurpreet wants to switch a portion of money from his bank account into debt mutual funds in order to fund the needs of boarding school education of his twins. How much corpus will he need to switch for this purpose?

a) 37,70,254 b) 39,78,494 c) 43,15,112

2. Gurpreet allocated his Equity share portfolio & ELSS portfolio to achieve this goal & invested in the same till first withdrawal. For the higher education expenses for Roshan and Geet, Gurpreet starts accumulating funds with monthly investment of Rs. 80,000 in an aggressive asset allocation yielding 9% p.a. After 4 years the allocation is moderated to yield 7.5% p.a. & He is investing in this fund till last withdrawal of higher education requirement. What excess/shortfall of funds you expect at the time of last withdrawal by following this investment strategy?

a. shortfall of 14,13,400 b. Shortfall of 13,98,790 c. shortfall of 16,63,640 d. surplus of 3,95,530

3. Gurpreet is planning for using the proceeds of his physical gold investments & PPF maturity amount for his world tour with his children. He has informed you that he will hereafter invest maximum permissible amount every year in the end of financial year till the maturity of the account. Post PPF maturity date the sale value of Physical gold & PPF maturity amount will be invested in a debt fund. When there is just 1 year left for the proposed trip, the amount will be switched to the liquid fund. What will be the amount of surplus or shortage of funds at the time of world tour by following this investment strategy.

a. shortfall 11033403 b. shortfall, 10395106 c. shortfall 11232302

4. Gurpreet has identified an under-construction property that he wants to purchase. The total cost is Rs. 75 lakhs. On 1st may 2016 the property is only 50% constructed, so same proportion amount is payable to builder at that time. On 1st may 2016, Gurpreet paid a down payment of Rs. 15 lakhs from own funds and for rest, he took a home loan for 15 years @ 9% p.a. For the further instalments, 15% of property value was payable to builder after 4th, 8th and the balance 20% on possession. All of these were to be disbursed by the bank. The possession of the house was given on 1st June 2017. What will be the EMI of after full disbursement of loan if first EMI started from 1st June 2016 and this loan product has total tenure of 15 years and assume rate of interest is not changed. a. 61300 b. 61800 c. 62,500





5. What will be the total interest liability as per Income tax rules could be allowed for deduction (Ignore maximum limit) & maximum amount allowed of tax deduction available u/s 24(ii) for interest AY 18-19? (Refer Question:4) a. 4,80,500 & 4,80,500 b 546,560 & 2,00,000 d. 5,01,000 & 2,00,000

6. For the purpose of wedding of both the children at their respective age of 25, you have advised Gurpreet to invest monthly in Debt MF and Equity MF in the ration 30:70 till they complete 19 years of age. Thereafter, further investments are made in Debt MF and Equity MF in the ratio on 60:40. Gurpreet wants to know how much amount he will require to invest monthly to fulfill the commitment of his children's marriage. You stress test that if Investment return in Equity 9%, Debt 7%, inflation 6% and Gurpreet can afford maximum SIP of Rs.35000 per month. How much curtailment in marriage expenses required after consideration of change in these factors?

a. 45,438 & 28% curtailment b. 45,438 & 22% curtailment c. 43,540 & 28% curtailment d. 43,540 & 28% curtailment

7. For the purpose of wedding of both the children at their respective age of 25, you have advised Gurpreet to invest annually in existing balance mutual fund scheme. Gurpreet wants to know how much amount he will require to invest annually to fulfill the commitment of his children's marriage.

a. 3,98,452 b. 4,15,830 c. 3,98,452

8. Gurpreet wants to create a trust that would receive a corpus, in case of any eventuality with Gurpreet’s life and utilize the corpus as follows. A Sum of Rs. 75 lakh towards purchase of house for the accommodation of both children’s, 50% of their current living expenses till Gurpreet’s retirement. Also accommodate their education expenses at 8% escalation. Calculate the value of this corpus today if whole of the corpus will be invested in a balance fund. a. 2.86 Cr b. 2.11 cr c. 3.61 Cr




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Case – C:

(Reference Date: 1st April, 2017)

Ms. Sahanubhuti, aged 34 years, is working in Mumbai. She is the sole guardian of her only daughter Shambhavi, aged 12 years, pursuant to the death of her husband Manohar, who died intestate, had no siblings and whose parents had predeceased. She is currently residing in a rented house. Her daughter is studying in the 6th Standard. She has approached you, a CFPCM practitioner, for preparing her Financial Plan. She has shared the following financial information with you:

Salary Income (2017-2018): Annual (Rs. lakh)

Basic Salary : 12.00 HRA : 7.20 Conveyance Allowance : 3.00 Special Pay : 8.98 Variable Salary : 8.00 Employee’s Provident Fund : 1.44 Employer’s Provident Fund : 1.44

Regular Outgoings Monthly (Rs.)

Basic Household Expenses : 40,000 Services availed : 12,500 School Fees : 12,500 House Rent : 35,000 Power, Telecom & Fuel : 12,500 Car Loan EMI : 25,585

Other Monthly & Annual cash outflows

SIP – Equity Mutual Fund (Index Fund) : 15,000 (Monthly) SIP – Balanced Mutual Fund : 10,000 (Monthly) Life Insurance Premium1 : 54,324 Health Insurance Premium2 : 27,631

Assets Market Value (Rs. lakh) as on 31st March, 2017

Equity Mutual Fund portfolio : 32.45 Balanced MF scheme investment : 12.79 Debt MF portfolio : 5.98 Demat Account - Shares : 21.92 Provident Fund : 9.93 Public Provident Fund (PPF) A/c.3 : 6.59 Gold & Diamond Jewellery : 15.75 Car4 : 7.50 Bank (Salary Account) : 2.82 Savings Bank account – Sahanubhuti5 : 33.26

1 (Annual –2 policies/ Total Cover Rs. 55 lakh) 2 (Annual – 2 policies/ Total cover Rs. 20 lakh) 3 Account matures on 1st April, 2023 4 Car purchased out of a loan availed of Rs. 14 lakh on 1st March 2014, interest being charged on reducing monthly balance for a term of 6 years. 5 Includes Rs. 20 lakh received towards life insurance claim of Manohar.

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227

Deposit with House Owner : 3.00 Money Back Insurance Plan 6 : 5.00

Liabilities (Rs. lakh) As on 31st March, 2017

Car loan : 7.99

Goals:

You, in consultation with Sahanubhuti, have identified the following financial goals for her family and the preliminary Roadmap to achieve them:

1. Send her daughter to a Boarding School – Immediately – Outlay Rs. 2.40 lakh p.a. (present cost) – for 6 years – To be met on year to year basis – education costs are escalating at 10% p.a.

2. Buy a house – Outlay of Rs. 1.20 crore – Look for a ready-to-occupy house immediately by availing a loan at 60% of value of house.

3. Invest suitably for the Higher Education of Shambhavi – for 5 years - higher education starts after 6 years – present cost Rs. 8 lakh p.a. – such costs are escalating at 10% p.a.

4. To invest monthly for Shambhavi’s wedding when she completes 25 years of age. The estimated present cost of marriage is Rs. 25 lakh, and cost escalation for marriage is 7% p.a.

5. Retirement Corpus at age 60 years – Corpus to sustain an inflation-linked income stream for a post- retirement life of 25 years.

6. A World Tour – after 11 years – Outlay of Rs. 12 lakh at current prices, cost escalation of 8% p.a. is expected.

7. A suitable Estate Planning to cover all her physical and financial assets.


1) Equity & Equity MF schemes/ Index ETFs : 11.00% p.a. 2) Balanced MF schemes : 9.50% p.a. 3) Bonds/Govt. Securities/ Debt MF schemes : 7.50% p.a. 4) Liquid MF schemes : 6.00% p.a. 5) Gold and linked investments : 6.00% p.a. 6) Real Estate appreciation : 6.50% p.a. 7) Bank/Post Office Term Deposits ( > 1 year) : 7.25% p.a. 8) Public Provident Fund/EPFO : 7.75% p.a.

6 Sum Assured of Rs. 5 lakh, Term of 15 years, Annual Premium of Rs. 45,565, Purchased on 18th September, 2012, terms of money back: 15% of SA at the end of 3rd/6th/9th & 12th year and 40% at maturity

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1) Inflation : 5.00% p.a. 2) Expected return in Risk free instruments : 5.50% p.a.



2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264

3


Sahanubuti Case Study – Questions 1. The cash flows required for the boarding school expenses, higher education expenses and wedding expenses of Shambhavi are managed from existing Equity mutual fund scheme and debt mutual fund portfolio. You advise to switch today suitable lump sum from equity mutual fund scheme to Debt scheme, so that withdrawal from Debt MF portfolio on yearly basis is enough to meet boarding school education requirements.

After 3 years, you again switch from Equity fund to Debt schemes funds equivalent to her higher education requirements. After 10 years you again switch suitable lump sum from equity mutual fund scheme to Debt scheme to meet her wedding expenses. You utilize the remaining balance in Equity mutual fund to meet in one lump sum her marriage expenses. What incremental SIP in Equity MF (Index fund) schemes needs to be started immediately till her wedding to ensure this strategy works?

a. 37,510 b. 28,857 c. 35,392

2 Sahanubuti want to know in her Money back Insurance plan, what amount of death claim would be received

by the nominee in case of any eventuality with her life today. He gives you information that Insurance Company has declared reversionary Bonus of Rs. 45 per thousand sum assured on every policy anniversary.

a. 500,000 b. 5,90,000 c. 5,15000

3. A Life Insurance Agent has approached Sahanubuti with two types of Term Insurance Plans:

(i) Plan I, without return of premium, term 30 years, Sum Assured of Rs. 1 cr, yearly premium payable Rs. 2.85 per thousand of SA

(ii) Plan II, with return of total premiums paid, on maturity, term 30 years, Sum Assured of Rs. 1 Cr, yearly premium payable Rs. 4.22 per thousand of SA.

She is not clear which plan to opt for and she seeks your advice on which policy is beneficial for her, if discounted by the risk-free rate of 6.5% p.a. (Assuming She lives till maturity of the Insurance Policy)

a) Plan I is better as the net present value is higher b) Plan I is better as the net present value is lower c) Plan II is better as the net present value is higher d) Plan II is better as the net present value is lower

4. Sahanubuti want to Calculate taxable HRA for FY2017 -19? a. 3,00,000 b. 4,20,000 c. 3,60,000





CFPCM Certification Exam preparation material 5. Sahanubuti want to Calculate Income tax liability for AY 2018-19? Assume She has earned Interest on saving bank A/c Rs. 1,20,000 in this FY 2017-18 & no capital gain liability. a. 897940 b. 904750 c. 901460

6. Sahanubuti purchased 3,000 Units of Equity Mutual Funds @Rs. 62 per unit on 8th May 2017. The Equity

Mutual Fund declares a dividend of Rs. 10 per unit. The record date for the dividend was 13th Aug 2017. Surinder sells 3,000 units on 15th September 2017 at Rs. 50 per unit. He wants to know the amount of short term capital loss he can claim in AY 2018-19?

a) He gets short Term Capital Gains of Rs. 6,000 b) He gets Short Term Capital loss of Rs. 36,000 c) He can claim Short Term Capital Loss of Rs. 30,000 d) He cannot claim any Short Term Loss for Tax computation

7. Sahanubuti’s had invested Rs. 5 lakh to buy 2000 shares of a listed company, Ramco Systems, in the year 2013-14. The Company had issued Bonus shares in the ratio 1:1 on 1st August 2016. She come to know the bad news about this company & She wants to sell the entire shares of Info Systems on 5th June 2017 at the prevailing market price of Rs. 600 per share through a recognized Stock exchange. What is the amount of taxable Capital Gains for Rajeev on sale of these shares if provisions of AY2018-19 are applicable today?

a) LTCG 7,00,000 & STCG 7,00,000 b) LTCG NIL & STCG 12,00,000 c) LTCG 7,00,000 & STCG 12,00,000

8. Sahanubuti’s advisor guide her to accumulate corpus for World tour goal by allocating existing debt fund MF Investments. Also asked her to immediately start monthly SIP of Rs. 5000 in the same fund of till her age of 38 years, thereafter double the SIP amount till her age of 41 and stop further SIP. You further advice, her to switch 25% of the outstanding debt fund every year to liquid scheme, start from the age of 42 to full redemption at age 45. How much Surplus/shortfall in achievement of this goal by following this Investment Strategy? a.145,870 b.189,270 c. 5,12,032 9. You calculate Sahanubuti’s additional Insurance requirement by following Income replacement method. Her expected Gross Salary in current FY is Rs. 40 Lakh which is increase by 5% p.a. during his service tenure. Such contribution considers income tax payable in the current year of Rs. 10.5 Lakh assuming growth rate of Salary. Her Self consumption is 35% of post- tax Income and assumed investment yield is 9% p.a. during the service tenure. What is the additional cover required after considering financial assets/liabilities? (Ignore Money back policy) a. 140 L b. 152 L c. 172 L d. 136 L



231

Case – D:

(Reference Date: 1st April 2017)

Mahesh and Neelam approached you, a CFPCM practitioner for preparing a Financial Plan to achieve their financial goals. Mahesh, aged 45 years, is working in Bengaluru for an MNC, at a managerial level. His wife Neelam, aged 42 years, is working in a Private Company and has gross income of Rs. 5 lakh p.a. The gross salary of both Mahesh and Neelam is likely to grow at 7% p.a. They are married for 22 years now. The couple has two children - daughter Sapna, aged 18 years, pursuing her Graduation in Economics, and son Varun, aged 16 years, studying in 12th standard. Sapna intends to pursue her post-graduaton and doctorate in economic sciences from a foreign educational institution. Varun has inclination to become a Doctor.

The family’s monthly household expenses are Rs. 60,000 excluding EMI on loans and Insurance premiums. Mahesh’s family along with his mother are currently staying in a house which was owned by his father, who passed away in December 2016. The house is valued at Rs. 75 lakh today.

Mahesh has a term insurance of Rs. 50 lakh (for 20 years, annual premium Rs. 13,985), the term expires 15 years from now. Both are covered under Group Medical Insurance by their respective employers. They additionally have a Rs. 10 Lakh family floater policy (annual premium Rs. 20,386 paid by Mahesh).

Salary Breakup of Mahesh for FY 2017-18

Components Annually (Rs) Basic 7,16,000 House Rent Allowance 1,80,000 Dearness Allowance 2,50,000 Transport Allowance 96,000 Medical Reimbursement 15,000 Entertainment Allowance 60,000 Total 13,17,000

The couple’s assets as on 31st March 2017

1. Cash in Hand Rs. 50,000 2. Bank balance Rs. 2,50,000 3. Diversified Equity Mutual Fund units at market value Rs. 12.78 lakh 4. Equity Shares at market value Rs. 25.83 lakh 5. Debt Mutual Fund units at market value Rs. 12.17 lakh 6. PPF A/c balance Rs. 8.25 lakh (Mahesh), Rs. 3.15 lakh (Neelam), both maturing on 1st April 2021 7. ELSS Mutual Fund scheme (growth option), Rs. 75,000 invested on March 20, 2015 at NAV Rs. 14.81 and

Rs. 75,000 invested on February 3, 2017 at NAV of Rs. 16.95. The current NAV is Rs. 16.26 per unit 8. A separate house in joint ownershipof Mahesh and Neelam with respective shares of 75% and 25%. This

house has two floors and is let out for rent of Rs. 12,000 p.m. each floor Present Market Value of this House is Rs. 1 core1

9. Gold Ornaments at market value Rs. 8.35 lakh 10. Car at market value Rs. 2.60 lakh

1 Mahesh and Neelam had jointly taken a housing loan of Rs. 30 Lakh in the ratio of their ownership of the house which cost them Rs. 47.50 Lakh on 1st April 2010. The loan is for 15 years at a fixed rate of interest of 9.25% p.a. They pay EMI proportionate to their ownership on the last day of every month

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11. 100 units of Sovereign Gold Bonds of 8-year maturity subscribed on 28th December 2016 at Rs. 2987 per unit; market price quoted on 31st March 2017 is Rs. 2861; interest @ 2.50% p.a. payable semi-annually on 30 June and 31 December

12. Government Securities (Gilt) MF Scheme; open ended scheme; Invested Rs. 4 lakh in New Fund Offering on 23rd March 2015; NAV on 31 March 2017 is 12.642

13. Money back insurance plan of 20 year term on the life of Mahesh with sum assured of Rs. 5 Lakh2 14. Unit linked insurance plan (aggressive allocation; 70% to equity) of 10 years in the name of Mahesh with

sum assured of Rs. 5 lakh3

Liabilities as on 31st March 2017

Housing loan outstanding : Rs. 20.89 Lakh

Goals & Aspirations

1) Plan for Varun’s medical education expenses for 6 years, beginning a year from now, estimated to be annually Rs. 10 lakh (current costs) with cost escalation at 8% p.a.

2) Plan for Sapna’s Post Graduation from abroad after three years, estimated to cost lump sum Rs. 75 lakh (current costs) cost escalation at 10% p.a.

3) Create a separate fund to provide holiday expenses annually throughout their retired life, amounting to Rs. 75,000 in current terms and escalating at 7% p.a.

4) To accumulate funds for marriage of Varun and Sapna. At current costs, they will require Rs. 10 lakh and Rs. 15 lakh respectively for the marriages of Varun and Sapna when they individually reach 28 years of age; such expenses escalate at 7% p.a.

5) Build a retirement corpus for inflation-adjusted current household expenses, retirement on Mahesh’s age of 60 years, expenses required till Neelam’s survival.

Life Expectancy

Mahesh : 80 years Neelam : 82 years




1. Inflation : 5.00% p.a. 2. Expected return in Risk free instruments : 5.50% p.a.

2 Annual premium Rs. 28,875, due in March every year, paid 16 premiums. The policy provides 25% of basic sum assured

each on expiry of 5th, 10th, 15th years, and on maturity of the policy. (Reversionary Bonus accrued: Rs. 2,43,100) 3 Annual premium of Rs. 35,000 p.a. due in end of April every year; six installments paid till date, this year premium due. (current unit balance 15,554.221 units, NAV: Rs. 16.56 per unit)

3 232

Cost Inflation Index: A)


2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264


Mahesh case study – Questions

1. You suggest Mr. Mahesh to achieve the goal for accumulation of funds for marriage expenses of Varun & Seema by immediately starting a systematic regular quarterly investment in existing diversified equity MF portfolio for 9 year. You also guide him to switch required amount in debt fund 3 years prior to respective marriage of Varun & Seema. What is the approximate quarterly investment amount required?

a. 15780 b. 17890 c. 16940 d. 24301

2. Mahesh’s ideal life cover has to be estimated which in case of any exigency will first repay the outstanding loans and the remaining would be invested along with the couple’s existing financial assets. Such combined corpus would be invested in a debt fund instrument to sustain the family’s living expenses and the specific financial goals of higher education of their children.

The living expenses need to be taken to the extent of 70% of their present household expenses up to Neelam’s age of 58 years and further 70% of then expenses for the remaining period of her expected life. What should be this ideal cover (ignore existing Insurance policies)?

a. 17290803 b. 17610918 c. 17380976 d. 20050000

3. Mahesh wants to know the taxable Income from house property for AY 2018-19. Both floors vacant for two months during the financial year 2017-18 and for 1 floor tenant has not paid rent for three months start from June 2017 to Aug 2017.

Mahesh has followed necessary steps for recovery of rent, however he has not able to realize the rent and Municipal taxes paid in previous year Rs. 8000. Interest liability for this rent out house is 1,35,090 for FY 2017- 18.

Calculate taxable value of Income from House property for Mahesh’s Income tax assessment for FY 2017-18?

a. 18910 b. 84910 c. 1582 d. 22582

4. Today, Mahesh wants to redeem his Gilt MF Schemes & With the full redemption amount he buy further units in same series of SGB which he has already bought. Mahesh wishes to hold all these SGBs till maturity. Calculate the impact of taxation in the AY 2018-19 for these transactions (including existing SGB)? Also evaluate capital gains on maturity in the 8-year tenure of these SGBs, if on maturity Gold price in its purest form is expected at Rs. 4,600 per gram. (CII expected in the year of maturity may be considered as 348).

a Give your answer





CFPCM Certification Exam preparation material 5. Mahesh and Neelam wants to create a separate fund for annual holiday vacation goal till Mahesh’s expected life span. If from the age of 60 accumulated corpus invested in a debt fund. You suggest an investment strategy by investing certain equal amount in Debt & equity fund and double the monthly Investment every five years till his Age of 60. He wants to know what amount he would invest in the last block of five years? a. 9594 b. 9768 c. 9884 d. 2398



236

Case-E:

(Reference Date 1st April 2017)

Sanjay aged 31 years is working in a managerial capacity with a private sector bank in Mumbai. He is married for over two years now. His wife Sherlyn is 28 years old. They have a son Ajinkya who has completed one year. They stay in a rented flat. Sanjay expects to work till 62 years of age. His salary details for the year beginning on date and current expenses are as follows:

Particulars Amount (Rs. per annum)

Basic 6,60,000 H.R.A. 1,98,000 Executive Allowance 9,60,000 Medical Reimbursement 15,000 EPF: Employee’s contribution 79,200 EPF: Employer’s contribution 79,200

Monthly Expenses

House Rent Rs. 25,000 Household Expenses Rs. 60,000

Following are the details of his assets as on 31st March 2017

Equity Mutual Fund Schemes Rs.8.25 lakh (Five schemes; one is sector fund, two are midcap funds, two are diversified funds with large cap focus; monthly SIP of Rs. 5,000 started 3 years ago and continuing in each scheme 1st day of month)

Balanced Mutual Fund Scheme Rs. 3.2 lakh (Invested 15,000 units at Rs. 10 per unit in NFO on 28-Mar-2014; continued monthly SIP of Rs. 5,000 for a year from 1-Jan-2015; Scheme’s Asset Allocation in equities/ debt is 50:50; dividend reinvestment option, net dividends of Rs. 1.5 per unit reinvested at NAV Rs. 10.323 on 4-Feb-2016 and Rs. 2.5 per unit reinvested at NAV Rs. 11.269 on 5-Mar-2017

Equity Linked saving scheme (ELSS) Invested in 5,000.000 units at price of Rs. 11.62 per unit on 2nd Feb. 2011; further invested Rs. 1,50,000 at price of Rs. 13.47 per unit on 18th Jan., 2014; open-ended scheme; growth option. NAV on 31st March, 2017: Rs. 22.893 per unit.

Gold Jewelry and coins 100 grams; received as gift on the occasion of marriage in the financial year 2014-2015; Current Price of Standard Gold (22K) Rs. 2,771 per gram

Car Rs. 3,00,000 (depreciated value) PPF Account: Rs. 3,77,440; the account was opened on 8th July, 2012 Balance in Savings Bank Account Rs. 1,50,000

Balance in Bank Fixed Deposit Rs. 3,00,000 invested on 1st August 2015 for 24 months; cumulative option, interest is compounded quarterly @ 9% p.a.

Employees’ Provident Fund Rs. 8,27,325 (Cumulative balance)

237

House Property Situated at Aurangabad, inherited on 1st December 2016 when the market value was Rs. 40 lakh

Term Insurance Plan Sum assured Rs.50 lakh; Rs. 10,000 p.a. premium.

He has following Financial Goals

1. Possessing a new flat in 18 months from now at Mumbai; Cost negotiated Rs. 1.20 crore; availed a loan at 80% ‘loan to value; interest pre-possession 9% p.a.; 25 year loan tenure after possession of flat.

2. Retirement at the age 62; retirement corpus to yield inflation adjusted expenses till Sherlyn’s lifetime

3. Buying a car costing Rs. 10 lakh (then price) in October 2017 after disposing of the existing car. 4. Admission of Ajinkya to an international school at age 4; Admission fee Rs. 4 lakh; Rs. 2 lakh p.a.

in first 6 years, Rs. 3 lakh p.a. in the next 9 years (all at current prices, cost escalation 8% p.a.) 5. Ajinkya’s higher education when he attains 19 years of age; Rs. 25 lakh would be required (at

current prices, Higher Education expenses escalating at 8% p.a.).

6. Create a corpus till age 50 for annual excursion at Rs. 1 lakh (current costs), annual withdrawals begin at age 50 and continue till Sanjay survives. Such expenses escalate at 8% p.a.

7. Ajinkya’s marriage expenses Rs. 15 lakh current costs, escalating at 6% p.a., marriage at age 27

8. A lump sum for his venture 10 years prior to his proposed retirement

Life Parameters

Sanjay’s expected life : 80 years Sherlyn’s expected life : 80 years

Assumptions regarding pre-tax returns in various asset classes


Assumptions regarding economic factors

1) Inflation : 5.00% p.a. 2) Expected return in Risk free instruments : 5.50% p.a.

238

Cost Inflation Index


2001-02 100 2005-06 117 2009-10 148 2013-14 220 2017-18 272

2002-03 105 2006-07 122 2010-11 167 2014-15 240

2003-04 109 2007-08 129 2011-12 184 2015-16 254

2004-05 113 2008-09 137 2012-13 200 2016-17 264


Sanjay cases study – Questions

1. Towards Sanjay annual excursion, you advise him to build corpus through balance fund and start monthly SIP till first withdrawal, beginning from today to meet the cost of Holiday trip. Calculate what is the monthly amount of investment required to achieve this goal if Sanjay step up his SIP by 5% every year? a. 12085 b. 12485 c. 11803 d. 12363

2. As a moderate risk strategy to meet entire education expenses, an Equity Fund allocated for entire education expenses and SIP is also started immediately in Equity Fund till last withdrawal.

The Debt Fund is used to meet the yearly expenses of basic education and higher education from lump sum amounts switched at certain intervals from the Equity Fund in the following manner: First; at age 4 to meet basic education expenses from age 4 to 8; Second, at age 6 to meet the education expenses from age 9 to 14; Third, at age 12 to meet the education expenses from age 15 to 19. What should be the amounts of monthly SIPs Equity Fund today?

a. 57615 b. 50,820 c. 49180

3. Today is 1st December 2017, Sanjay needs funds to expand his business; he sold his Inherited house, for Rs. 42 lakhs. The brokerage charges to be incurred on sale transaction are 1% of sale amount.

Sanjay’s father purchased this house in June 2007 for Rs. 12 lakhs for investment purposes and further spent Rs. 2.60 lakh in August, 2013 on its renovation. He entered into an agreement for sale of this house for Rs. 38 lakhs in March 2016 and received Rs. 1 lakh towards advance. However, the buyer could not meet his commitment and the advance was forfeited by Sanjay.

Sanjay wants to know from you the amount of capital gains on this sale transaction as per AY2018-19?

a. 1348313 b. 1306313 C. 1128080 d. 1248313

4. Sanjay redeems all the units of ELSS MF Schemes on 31st Mar 2017. He wants to know the annual rate of return he earned on this investment? (Ignore taxes)

a. 16.6% b. 13.96% c. 14.81%





CFPCM Certification Exam preparation material 5. Today As per low valuations in small cap companies, Sanjay wants to switch 50% of his balance MF Scheme to Small cap fund. Assume he bought 910 units through Rs. 5000 SIP started from 1st Jan 2015 for a year. Assume NAV as on 31st March 2017 is 12.08. He wants to know what is the Units balance as on date in this balance mf scheme (before switch) and CAGR in this investment?

a. 20806 & 8.67% b. 23810 & 10.5% c. 22263 & 9.68%

6. Sanjay and his wife wish their retirement corpus to sustain 70% of their Pre-retirement household expenses Rs. 10,20,000 p.a. inflation adjusted, till Sanjay Life time and 70% of then expenses till Sherlyn expected life. They also want to gift Rs. 60 Lakh to his child and an additional Rs. 5 Lakh towards charity to an Old Age home at Sanjay age of 70 years.

The sums are at absolute values then. They also wish to provide in the corpus an additional Rs. 10,000 pm (Current costs) towards Healthcare after Sanjay age of 70 years till Sherlyn expected life. You estimate the required corpus, if Investment yield is 7% p.a.

a.5.43 cr b.6.38 cr. c. 5.93 cr d. 6.85 cr





1

RETIREMENT Q. 1 Your client aged 34 now requires at his retirement age of 60 years a corpus to sustain an annuity of Rs. 55,000 p.m. (current cost) inflation linked for a post-retirement life of 25 years up to which he expects to live. You estimate that his goal would be achieved by investing corpus at a return of 8%. Your client apprises you that he would additionally like to start a Trust with a donation of Rs. 1 crore (value then) on his reaching age 70 years and would bequeath posthumously a further amount of Rs. 1 crore (value then) for his son. He asks you whether this arrangement would be feasible by taking a little more risk while investing the retirement corpus. You estimate by taking 1% additional return than envisaged and opine that____________ shortfall expected in bequeathing to son. (Consider inflation at 5.5%). a. 5,30,316 b. 45,72,959 c. 54,27,042 d. 42,24,108 2. Your client aged 34 now requires at his retirement age of 60 years a corpus to sustain an annuity of Rs. 55,000 p.m. (current cost) inflation linked for a post-retirement life of 25 years up to which he expects to live. You estimate that his goal would be achieved by investing corpus at a return of 8%. Your client apprises you that he would additionally like to start a Trust with a donation of Rs. 1 crore (value then) on his reaching age 70 years and would bequeath posthumously a further amount of Rs. 1 crore (value then) for his son. He asks you whether this arrangement would be feasible by taking a little more risk while investing the retirement corpus. What rate of return should be aimed to achieve that goal? (Consider inflation at 5.5%). a. 8.5% b. 9% c. 9.1% d. 9.28% 3. Your client aged 34 now requires at his retirement age of 60 years a corpus to sustain an annuity of Rs. 55,000 p.m. (current cost) inflation linked for a post-retirement life of 25 years up to which he expects to live. You estimate that his goal would be achieved by investing corpus at a return of 8%. Your client apprises you that he would additionally like to start a Trust with a donation of Rs. 1 crore (value then) on his reaching age 70 years and would bequeath posthumously a further amount of Rs. 1 crore (value then) for his son. He asks you whether this arrangement would be feasible by taking a little more risk while investing the retirement corpus. You estimate by how much the additional goals should be moderated in order to achieve them by taking risk of just 1% extra return? (Consider inflation at 5.5%). a. 905025 b. 9014975 c. 9214800 d. 928500




2

Education Goal 4. For his son's higher education after 15 years, a client estimates a lump sum required of Rs. 50 lakh and a further Rs. 30 lakh for his son's business establishment 3 years later. You devise an investment strategy whereby equivalent funds are available in liquid scheme after 15 years. This involves starting a SIP in equity schemes immediately, increasing such investment by 20% after every three-year period and thus continuing for a total 12 years. At the end of 12 years, 30% of the outstanding equity fund corpus every year is redeemed and invested in liquid funds until entire equity fund is redeemed after 15 years. What Equity SIP amount is required immediately? If a stress test is applied for 2% reduction in equity returns and 1% reduction in liquid returns, by what percentage equity SIP amount should be stepped up in every three-year span? (Assume returns from equity funds and liquid funds in the first analysis to be 12% and 6%, respectively). a. 29% b. 32% c. 35% d. 37% 5. For his son's higher education after 15 years, a client estimates a lump sum required of Rs. 50 lakh and a further Rs. 30 lakh for his son's business establishment 3 years later. You devise an investment strategy whereby equivalent funds are available in liquid scheme after 15 years. This involves starting a SIP in equity schemes immediately, increasing such investment by 20% after every three-year period and thus continuing for a total 12 years. At the end of 12 years, 30% of the outstanding equity fund corpus every year is redeemed and invested in liquid funds until entire equity fund is redeemed after 15 years. What Equity SIP amount is required immediately? (Assume returns from equity funds and liquid funds to be 12% and 6%, respectively). If a stress test is applied, if Client can afford to invest SIP amount Rs. 12,000/- initially followed by step up as given in question. how much impact there would be on son's business establishment goal. a. Shortfall of 18,43,134 b. Shortfall of 11,56,866 c. Shortfall of 17,63,134 d. Shortfall of 19,60,200


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